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Payroll Tax Holiday-  What's The Impact on Employee Pay?

Posted by Jay Schulze on 8/10/20 3:23 PM
Jay Schulze

On Saturday, August 8th, 2020 the President signed an executive order (EO) authorizing the deferral of withholding, deposit and payment of the employee portion of Social Security taxes.  The EO applies to wages paid between September 1, 2020 and December 31, 2020.  On the face, this appears to increase the take-home pay by 6.2% for employees earning less than $100k per year.  However, the EO does not forgive the employee portion of the tax.  This presents problems for both employer and employee.

Employees need to know if they will be expected to pay this tax at a later date.  Will it be deducted from their pay on future paychecks, or must they pay it to the IRS directly along with their 1040 tax filing next spring?  Can an employee elect to continue tax withholding, or are employers required to stop?  Clearly this payroll tax holiday can complicate budgeting for employees nationwide.

The EO does not eliminate or forgive employee taxes, so budgeting for a future tax bill is essential for employees.  Many will prefer to continue  tax withholding.

Employers should be concerned about their liability for remitting both employer and employee portions of Social Security tax.  If they are not allowed to withhold from employee pay, how is the employee portion going to be paid?  Employers don't want to be left picking up the tab if they stop withholding and an employee later quits, leaving the employer with no way to collect the employee portion of the tax.

Further guidance from the Department of Treasury is expected shortly, and certainly before the change goes into effect on September 1, 2020.  In the meantime, HWS suggests you discuss the problems highlighted above with your employee and continue to withhold Social Security taxes from employee pay to ensure your employees are not faced with an unexpected tax bill in the spring.  We will provide additional guidance as clarification is received from Treasury and as legal challenges to this EO play out.

Topics: nanny, nanny payroll tax, nanny tax, agency, senior, CPA, Tax Holiday

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