Your Business Can Now Stop Withholding Employee Payroll Taxes: Need To Know Facts About The Tax Holiday

Employers affected by the ongoing COVID-19 emergency have received a tax holiday that began on September 1. This tax holiday is only available for employees who have bi-weekly paychecks that are less than $4000 (or an equivalent of a salary of $104K a year).

And in the fast-changing news world of 2020, the Government Accountability Office indicated on September 16 that the tax holiday program has a chance of being overturned. Keep an eye on the news for updates about whether or not the program sticks around.

What Is The Payroll Tax Holiday?

Payroll taxes are responsible for funding social security, Medicare, and local taxes. Employees pay half and employers pay the other half of these taxes. This payroll tax holiday is a break/breather from the burden of paying payroll taxes for both the employee and the employer until January 1, 2021. This break can temporarily create more cashflow for businesses and employees, but at some point, the taxes will be paid back.

An employer has the power to choose whether or not to take advantage of the payroll tax holiday.

Companies that opt into the payroll tax holiday can withhold payroll taxes for employees and defer payments on those taxes until April 2021. And again: this is a tax deferral only. Money withheld from paychecks between September and December this year will have to be paid back.

The IRS memorandum stated:

“An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.”

Given a general lack of guidance about best practices for how to assist employees to pay back the deferred taxes, many companies are choosing not to take advantage of the tax holiday at this time.

How Could The Tax Holiday Help?

The tax holiday helps create immediate cashflow from September-December. The boost to paychecks is temporary, so this assistance is essentially a temporary loan due in January.

Whether or not that loan could help is quite specific to the employer/employee; however, the US Chamber of Commerce and a coalition of thirty other organizations sent a letter to the government asking it to reconsider the tax holiday since it creates an undue hardship on the taxpayer in January.

In a signed letter to Congress, they stated:

“If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging. But under a simple deferral, employees would be stuck with a large tax bill in 2021. Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year. It would also be unworkable to implement a system where employees make this decision. Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”

If you decide to take advantage of the tax holiday, be sure to inform employees about your decision and explain why they may see a paycheck bump this last quarter. Also, explain your company’s plan for how employees will pay back their portion of the deferred taxes.

More Tax Tips

Navigating taxes and understanding various tax components and implications can be a headache for small business owners. If you need to brush up on some of the basics, be sure to read our Complete Guide to Small Business Taxes or our article on write-offs for small business owners.

If you’ve hired an accountant to manage your taxes, you can also check out Small Business Taxes: What Information Does My Accountant Need so you can show up prepared for all your appointments.

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