After much negotiations regarding forming another new economic support plan, President Donald Trump signed an executive order and three memorandums on the deferment of the collection of payroll taxes, which starts today September 1, 2020 and goes until the end of the year. The Committee for a Responsible Federal Budget estimated as much as $100 billion extra pay among eligible employees from September to December 2020. Although this so-called “Payroll Tax Holiday 2020” aims to alleviate the economic constraints posed by the COVID19 pandemic especially for the American workforce, this seems to have caused a wide confusion surrounding its implementing rules and regulations.
Employee Payroll Tax Holiday 2020 Overview
If you are an employee making less than $100,000 a year or less than $2,000 per week, the 2020 Payroll tax Holiday simply means that you are eligible to pause payment of some portion of your taxes. The executive order signed by President Trump on August 8, 2020 specifically states that employees with earnings that make them eligible to observe Payroll Tax Holiday will be able to defer a portion of their specific payroll taxes on their wages earned from Sept 1 to December 31, 2020. Eligible employees may defer payments of their Social Security or Medicare taxes, but not their federal withholding tax and other state and local payroll taxes. However, it must be highlighted that this deferral will serve as an interest-free loan that would need to be repaid.
The Dilemma
This is because businesses are faced with both logistical and legal difficulties to respond to the president’s payroll tax holiday. It will surely complicate payroll processing when the payroll tax collection is altered midyear, especially that only some employees will be eligible for it based on their salary threshold. Hence, it created a dilemma among employers on whether to withhold or not. In addition, when a portion of the taxes will be deferred from September to December 2020, then what happens in January 2021? The presidential order did not provide a solid guidance on repayment.
The US Treasury Department is expected to release guidance on how the payroll tax suspension will work. President Trump already instructed his Treasury secretary to explore options including passing a legislation to forgive those payroll taxes altogether. No one knows for sure if the repayment rules will be restructured, like what happened with the Paycheck Protection Program (PPP) Loan Forgiveness Guidance, which means that it might complicate rather than alleviate the economic challenges posed by the pandemic as it simply means that if you don’t pay now, then you pay later.
How does it work?
For the employees:
In general, taxes take away about 7.65% from the employee’s wage every payday to fund Medicare and Social Security : 1.45% for Medicare and 6.2% for Social Security. An equivalent amount of tax is paid by the employer. For example, a worker earning $20 per hour and working 40 hours a week will get $61 more per week or about $265 per month or an accumulated amount of $1,060 from September to December 2020.
For the employers:
Unfortunately, the payroll tax holiday is meant to assist employees. Employers, on the other hand, may defer their portion of social security tax under the CARES Act, which works very similar as President Trump’s payroll tax holiday – it will need to be repaid. Under the CARES Act, employers must repay 50% of the deferred social security taxes by the end of year 2021.
How to comply?
Once the guidance is released by the government, eligible employees’ social security and Medicare taxes are required to be deferred. This means that you will need to track and report the amount deferred for each of the employees, and our expert CPAs are the best men and women for this job. Whether you’d like to indulge us for a commitment-free consultation regarding your 2020 Payroll Tax holiday, or simply in the look out for a reliable tax and finance management support for your business, we invite you to book a schedule on this link below.
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