On August 8, 2020, the President of the United States issued an executive order to provide a payroll tax holiday for American workers. This treasury guidance permits employers to defer the 6.2% tax employees pay toward Social Security from September 1 through December 31, 2020. Chances are, your employees have approached your HR and payroll departments with questions about what this guidance means for them personally. You may find yourself with a few questions of your own.
To help clear things up, here’s what you need to know.
What the Payroll Tax Covers
A payroll tax cut halts the collection of certain wage-based taxes, mainly those collected for Social Security. Typically, companies and their workers each pay half of the total 12.4% Social Security tax due for each employee. But under this order, you can refrain from withholding your staff’s share of 6.2% of wages up to $137,700.
The bottom line: the payroll tax cut gives each worker a 6.2% raise through the end of the year. This however only applies to employees whose biweekly pay is below $4,000 on a pretax basis or the equivalent amount with respect to other pay periods.
It’s a Deferral, Not Tax Forgiveness
The payroll taxes accumulated through the end of the year will be deferred, not forgiven…at least as it currently stands. Unless a permanent cut is enacted in the future, the deferred taxes would need to be repaid in early 2021. This will mean employees will see smaller paychecks early next year as their company’s have to pay back the withheld taxes by April 30, 2021 while also applying the payroll tax as per usual at the start of the year.
Collecting the Deferred Tax Will Be the Employer’s Responsibility
If it’s your company, it’s up to you to collect and pay the tax deferred to the federal government within the window of January 1 and April 30, 2021. Any tax that is not repaid by the end of April will be subject to interest and penalties.
How you collect is up to you and your workers. Most likely, you will deduct an additional 6.2% from each paycheck over the first four months of 2021. However, if for example an employee of yours leaves the company during that period, you may withhold the remaining amount due from his or her final paycheck.
The Employer is Not Obligated to Offer the Payroll Tax Holiday.
Business owners in the private sector have a choice whether or not to participate. We recommend talking to your HR and payroll teams to gauge your staff’s interest and to see how costly or labor intensive it will be to process the changes in your payroll system.
Click here to see the IRS Guidelines for the executive order.
At Accu Data, we are committed to help our clients navigate the complicated waters of payroll and human capital management. Contact us today to see how our unified, single-source HCM solution can help you increase organizational productivity and profitability, with comprehensive functionality for Payroll, Human Resources, Time & Attendance, Benefits Administration, Learning Management System, ACA Compliance and more.