Executive Order: Here’s What You Need to Know About the Tax Holiday

Beth Dean 08.31.20
104 Glasses On Open Book

We recently reported that President Trump signed an executive order and three memoranda for COVID relief. With no interference thus far from Congress, those orders are scheduled to become active September 1. 

One of the memoranda we are most frequently asked about is the “payroll tax holiday.”

This provision gives employers the option to let employees defer their 6.2% portion of the Social Security FICA tax from their paychecks beginning September 1, until the end of 2020. It applies to employees who earn less than $4,000 gross biweekly. The tax holiday would be a deferral and not an exemption, so employees would still have to repay those taxes after the deferral period ends unless there are exceptions.

On Friday, the IRS issued guidance to clarify some of the details for the payroll tax holiday. However, some specifics remain vague, such as how to remit the taxes. It appears that the burden will rest on the employer to make sure taxes are collected and paid back to the IRS after the “holiday” finishes.

The rundown

Based on the information we have now, here is what this deferral would look like for your employees.

Companies have the option to accept or deny the tax deferral. It would only apply to the employee’s 6.2% portion of the Social Security tax. Employers must continue to pay their matching 6.2% of that tax. If opting to make the deferral available to employees, employers must equally offer it to all of them. Whether the employees choose to utilize it after the company opts in will be their individual decisions.

This provision does not defer any other taxes, such as federal, state, or Medicare FICA tax. Those will continue to be collected from taxable pay and remitted on schedule.

As a reminder, this program would defer the social security taxes, not erase them. Once the “holiday” finishes at the end of 2020, tax repayments will begin, running from January 1 – April 30, 2021. All deferred taxes must be repaid before May 1, 2021, or the IRS will start to assess fines to the employer. 

There’s been some speculation on possible tax forgiveness, but there is so far no indication of that happening. Tax forgiveness cannot be granted by executive order alone and Congress is reluctant to grant it because they need to fund the Social Security system.

What this means

If your employee utilizes the payroll tax holiday in 2020, they will repay it in 2021. Beginning January 1, 2021, their portion of the social security FICA tax would increase to cover the usual 6.2%, plus an additional deduction to recoup those deferred taxes and continue until they fully repay their deferral. Any funds not repaid will be the responsibility of the employer.

Here’s a simplified, hypothetical example of your employee’s paycheck if they choose the tax deferral:

Karl, a single employee with no dependents, earns $50,000 per year, or approximately $1,923 biweekly. He decides to utilize the payroll tax holiday that his company opted in to. 

Before September 1, 2020, Karl’s usual paycheck might look like this. Items in parentheses represent deductions. Numbers are rounded:

  • $1923 gross, taxable biweekly pay
  • ($423) 22% federal taxes
  • ($28) 1.45 % Medicare FICA tax
  • ($119) 6.2% Social Security FICA tax
  • ($77) state tax (assuming Oklahoma)
  • $1,276 net pay

Beginning September 1 until the end of 2020, his paycheck would look like this:

  • $1923 gross, taxable biweekly pay
  • ($423) 22% federal taxes
  • ($28) 1.45 % Medicare FICA tax
  • $0 Social Security FICA tax
  • ($77) state tax (assuming Oklahoma)
  • $1,395 net pay

Beginning January 1, 2021, until April 30, 2021, Karls’ paycheck would look like this while he repays his Social Security taxes:

  • $1923 gross, taxable biweekly pay
  • ($423) 22% federal taxes
  • ($28) 1.45 % Medicare FICA tax
  • ($238) 12.4% Social Security FICA tax*
  • ($77) state tax (assuming Oklahoma)
  • $1,157 net pay

*12.4% assumes the employee owes 6.2% of the regular Social Security tax, plus an additional 6.2% to cover the amount deferred in 2020. Actual amounts may vary based on amounts of deferrals.

Based on the math and the current guidance, it’s difficult to see any benefit for the employee in deferring Social Security.

Further, suppose the employee is somehow unable to repay the full amount of the deferral. Based on the IRS guidance, it appears the company will be liable for making up any of those funds.

Based on professional tax and industry guidance, Nextep is not taking action at this time to process these tax deferrals. We will continue to keep an eye on the situation and the other provisions of the executive order and memoranda. Please contact your Nextep specialist for additional questions.  

Also on Nextep

Be Aware of These Red Flags For Incorrect Employee Retention Credit (ERC) Claims The IRS is urging businesses that claimed the ERC pandemic-era credit to review their eligibility as a key deadline approaches.  Here are 7 ERC red flags to watch out for that could delay your claim: Claiming for too many quarters: Qualifying for […]
Read more
Remember that new independent contractor rule coming soon? It’s the one that makes it harder for businesses to call a worker a “contractor.” As a reminder, that big change kicks in March 11, 2024. Why should you care? More workers might become employees. This means benefits like minimum wage, health insurance eligibility, paid time off, […]
Read more
What Businesses Need to Know Last week, we discussed collaborating with employees who request religious accommodations during Ramadan. This week, we’ll look at some of the nuts and bolts of religious accommodations at work and the impact of last year’s Supreme Court case, Groff v. DeJoy. The Groff v. DeJoy decision, as we covered when […]
Read more
Ramadan, the holy month of fasting and reflection for Muslims, begins on Sunday, March 10, 2024, and end on Tuesday, April 9. As an employer, understanding your Muslim employees’ needs during this time fosters a supportive and inclusive workplace.  It’s important to consider that rejecting flexible requests without a valid reason could be seen as […]
Read more
Workplace safety starts with good records. Every company must maintain records of worksite injuries and illnesses throughout the year. This recordkeeping is a legal requirement mandated by the Occupational Safety and Health Administration (OSHA). This quick guide simplifies the process, outlining your responsibilities. The Basics: Companies must document worksite injuries and illnesses for the entire […]
Read more
Big Change for Gig Work and More The Department of Labor (DOL) has revised its rules for classifying workers as independent contractors, making it more difficult for businesses to do so.  Effective March 11, 2024, this change impacts workers across the US and could have significant implications for businesses of all sizes. New rules make […]
Read more
Heads up, businesses! Beginning February 1, many workplaces must post a summary of work-related injuries and illnesses from the previous year. This simple one-page form, called the OSHA 300A, gives employees easy access to safety info specific to their worksite. Here’s the OSHA 300A rundown: Who needs to post? Companies with 11 or more employees […]
Read more
2023 and 2024 have seen several updates to federal law that impact your workplace labor posters. Are yours up to date? The new year allows you to check it out and avoid fines! Updates that affect your posters include (but are not limited to): PUMP Act for Nursing Mothers EEOC Pregnant Workers Fairness Act (PWFA) […]
Read more
At least 22 states and nearly 40 local jurisdictions will increase their minimum wage rates on January 1, 2024. Below is a summary of these changes and guidelines to help you comply with your minimum wage requirements. As a reminder, in cases where federal, state, or local regulations differ, the employer must use the law […]
Read more
Essential Updates for Employers in the New Year Heads up, employers: there are several new workplace laws and regulations in 2024.  The new year is just around the corner, bringing a wave of changes for employers nationwide. These regulations aim to create a fair and supportive work environment that attracts and retains top talent. Federal […]
Read more
Confused by the ever-changing SUTA (State Unemployment Tax Act) landscape? We’ve compiled a comprehensive list of 2024 SUTA wage bases for each state, making it easier for you to stay compliant and manage your payroll taxes effectively. Simply find your state in the table below and discover the applicable wage base for the upcoming year! […]
Read more
Ah, the holiday season—a time for joy, festivities, and the age-old puzzle of compensating your employees. Let’s demystify the rules of holiday pay for both our hourly (nonexempt) and salaried (exempt) workers. For the Hourly Heroes Picture your business decked out in holiday cheer, but your nonexempt employees are sipping cocoa at home. Under the […]
Read more

Download Our App


Download the Nextep Mobile App in Apple iOS or Google Play