President Trump issued an Executive Order creating a payroll tax holiday on Aug. 8, 2020. The holiday gives employers the ability to temporarily defer a portion of employee payroll taxes. In December 2020, a coronavirus relief bill gave businesses more time to repay the Social Security taxes they don’t withhold from employees.
While the holiday was created as a way to provide individuals with financial relief, it’s also created some confusion for business owners and accountants. Here’s what we know about this deferral.
How does the payroll tax holiday work?
The payroll tax holiday allows businesses to not withhold employee Social Security taxes between Sept. 1 and Dec. 31, 2020, without incurring any penalties or fees. Employers must pay the deferred taxes between Jan. 1 and Dec. 31, 2021. Originally, the deadline to pay was April 30, 2021. Only employees with wages or compensation less than $2,000 on a weekly basis, $4,000 on a bi-weekly basis, or $8,666 monthly are eligible.
Employers are still responsible for paying Medicare payroll taxes and the employer portion of Social Security payroll taxes.
The IRS issued a notice on Jan. 19, 2021, to supplement the Executive Order and reflect the changes made by the Consolidated Appropriations Act, 2021. Despite this, there are still some unanswered questions. It’s unclear at this time how employers should go about collecting deferred taxes from their employees.
Who’s responsible for paying the deferred taxes?
As an employer, you’re responsible for the tax liability and timely repayment of the deferred taxes. If you can’t collect these funds from your employees, you’ll need to make other payment arrangements. You’re also responsible for paying the deferred taxes if an employee is terminated.
Do I have to participate?
No. The IRS ruled this deferral is voluntary. You can choose to participate or not.
Although this deferral would give employees a larger paycheck over the next few months, it also means those employees will have to pay more in taxes in 2021. We recommend working with your payroll provider and tax professional to determine if this deferral is beneficial for your company and employees.
Originally published 9/24/2020. Updated 2/11/2021.
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