IRS Payroll Tax Holiday

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President Trump’s newly-signed Executive Order is aimed at helping employees keep more money in their pockets, but there have been a lot of questions on exactly how this payroll tax holiday will accomplish its goal.  Let’s look at how this will really work for the employees and employers.

Employees

Here are some key facts on what the tax deferral means for the employee:

  • Your employer can opt in to the deferral and is not required to tell you that they are participating.
  • The deferral is effective for payroll periods beginning 09/01/2020 through 12/31/2020.
  • Your employer can defer withholding your portion of Social Security (SS) tax (6.2% of taxable wages) from your paycheck. That means you’ll have a bigger paycheck during the deferral period.
  • You will be required to pay it back beginning 01/01/2021 through 04/30/2020.
  • During the payback period, you will have to pay back the previously deferred taxes. For example, if $1,000 was deferred, the $1,000 will be divided between your paychecks for the four months.

Basically, if your employer decides to participate in this holiday, you will have more money in your pocket from September through December 2020, but from January through April 2020, you will have less money. If you don’t want to participate even though your employer is participating, you will need to reach out to your employer to request it. It is up to your employer to allow you to opt-in or not. Keep in mind that if you’re a federal employee, you do not have the ability to opt out because all federal agencies have opted-in the deferral.

Employers

Here are some key facts on what the tax deferral means for the employer:

  • You can choose to opt-in, it is not mandatory participation. Federal agencies have opted-in.
  • The deferral applies to any employee whose pre-tax wages are less than $4,000 for a bi-weekly pay period, or the equivalent of threshold amount with respect to other pay periods.
  • For any employee whose wages are above the threshold amount, their portion of SS tax must be withheld as normal.
  • You are ultimately responsible to pay back any deferred SS tax. If you don’t pay it back, you will be charged penalty and interest.
  • If an employee leaves before the payback period, you will still be responsible to collect the deferred SS tax from the employee. You will still be responsible for paying the deferred amount even if you can’t collect it from the employee.

Looking at the key facts above, there are a lot of risks of unpaid taxes across board. Employees will receive less money than their normal after-tax pay next year if they decide to opt-in. Employers will be on the hook to make sure the deferred tax amounts are paid back in a timely fashion.

President Trump has stated his intention to make the deferred tax forgivable, but only an act of Congress can make that official.   For now, there is a requirement to pay it back beginning 01/01/2021 through 04/30/2020.

If you will be participating and are not sure if you have the ability to pay it back, contact us so we can help you make preparations to pay the taxes back to the IRS.

~ Olivia Siauw, EA is the Director of Business Development at Omni Tax Solutions. She is an Enrolled Agent and a leading expert in tax resolution for since 2007.

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