New IRS Guidance Allows for a Payroll Tax Holiday: Should Your Employees Participate?

By September 14, 2020September 17th, 2020Employment News, Payroll, Withholding Taxes

 

The IRS issued Notice 2020-65 on August 28, allowing employers to suspend withholding of employees’ Social Security payroll taxes as part of COVID-19 relief. The IRS is essentially giving employees a loan to try and help them through a tough period but it remains to be seen whether those employees who often live paycheck to paycheck will be able to afford to repay the loan, through a doubling of their payroll deductions next spring.

Here are the details of the guidance:

  • This payroll tax “holiday” begin September 1 and runs through December 31, 2020 and applies only to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 per year.
  • Companies that suspend collection of employees’ payroll tax during the “holiday” are instructed to collect additional amounts from workers’ paychecks from January 1 through April 30, 2021, to repay the tax obligation.
  • After April 30, 2021, penalties, interest and “additions to tax” will begin to accrue on employers for tax amounts that have not been repaid.

The guidelines as well as much of the conversation about the tax holiday are murky at best and leave employers exposed to one real pitfall: What happens if an employee quits?

If the employee resigns before repayment is complete, the employer is encouraged to deduct the amount owed from their final paycheck as ultimately the employer, not the employee, is liable for the employee’s share of Social Security taxes. If this is not feasible, the employer may make other arrangements and is given an additional year to make those collections. Ultimately, if the obligations remain uncollected, the employer will have to pay the balance owed.