In response to the Covid-19 emergency and because Congress has been unable to pass new legislation to help the economy, Donald Trump issued several executive orders on August 8. One of them was the Payroll Tax Deferral Memorandum. The so-called payroll tax holiday reduces that taxes withheld on employee paychecks from September 1 through the end of the year.
Among the taxes withheld on employee paychecks are the are the Social Security payroll withholding which is 6.2% and the Medicare tax is 1.45% for a total of 7.65%. The company pays another 7.65% of the tax.
Under the Trump payroll tax holiday, the employee’s portion (7.65%) is not to be withheld starting on September 1. The average weekly paycheck in the United States is $1,086.85. That translates to $83.14 in extra money for the employee, assuming a 40-hour work week.
On Friday, the Treasury Department issued a guidance on how companies are supposed to handle the payroll holiday.
Under the guidance, the $83.14 is not forgiven. It is just deferred.
In other words, if the employee works 40 hours for the rest of the year, they will see about $1,496.52 extra in their paychecks through the end of the year.
But here is the important detail that employee need to be aware of. They still owe the $1,496.52 extra to the IRS. It is not forgiven.
That amount will need to be paid by April 30, 2021.
How companies will collect the $1,400 is not addressed by the guidance. However, the guidance makes companies responsible for the money.
For Company Owners
Under the IRS guidance, company owners can choose to not withhold the taxes on their employee paychecks but does not force them to.
Why is that important?
Under the IRS guidance, it is the companies that are responsible for the tax amount due next year.
To do so they either double withhold the taxes on the payroll checks starting on January 1 or decide to have their employees pay back the $1,400.
Some companies may choose to absorb the cost of the tax holiday but are not required to do so.
It is also important to note that the company must still pay their share of the taxes.
For company owners, knowing that they are responsible for the tax obligation, they may choose to do nothing and continue to withhold the amounts on the payroll checks leaving the employees without the tax holiday.