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.  

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