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Payroll Tax Holiday Would Take Form of a Deferral

There have been recent reports in the news concerning an executive order establishing a “payroll tax holiday” beginning September 1. Although we have seen very little in the way of details on the proposal it appears that it would take the form of a “deferral” of social security and possibly Medicare withholdings from an employee’s paycheck. It appears that this decision is voluntary for the employer. The administration wants to make these cuts permanent but it is unclear how that would be accomplished.

The deferral would need to be repaid (withheld from net pay) probably before 12/31/20. At this point it is not clear how this would be done. Payroll companies are uncertain how they can make the program changes necessary given the short turnaround time.

Beware of Possible Employer Jeopardy

As a general rule we do not recommend ceasing to withhold employee taxes which would most likely be deemed payable and due by quarter end. This could put the employer in jeopardy. What if the employee quits before you can withhold the cumulative social security and Medicare taxes on the final paycheck? Would the employer be legally liable for the shortfall in withholdings? Additionally, how will the employee feel when a large deduction is taken on their last paycheck for the year? And what if the final pay check is not large enough to cover the deferral? In our opinion, it is better for the employer not to “defer” an employee’s tax withholdings but to continue on as usual.

A Work-Around for Recording Reduction in Payroll Taxes

With payroll systems unlikely to make changes before September 1, how is the employer to comply with the change if an employee is adamant on receiving the benefit? One way would be to record the reduction in payroll taxes as a loan to the employee. This would would increase the employee’s pay check by the payroll tax defer while making it easy to deduct the entire amount on the final check for the year. This would preserve the payroll system’s tax calculations and make quarterly payroll tax reporting easier at year end.

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