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The Complete Payroll Blog

How to Use the New Payroll Tax Deferral “Tax Holiday”

Posted by Complete Payroll | Sep 3, 2020 4:27:13 PM

Employer Compensation Expense Tax_ About New York State's New Payroll Tax - Complete Payroll

Are you using the new employee payroll tax deferral? The U.S. Treasury Department and the Internal Revenue Service (IRS) recently announced new guidelines that allow employers to stop withholding payroll tax temporarily.

The new deferral comes from a presidential executive action and is known as a “tax holiday.” Although payroll taxes will still have to be paid later, this provides much-needed short-term relief for employees hit hard by the COVID-19 pandemic.

There’s also the possibility that these taxes will be forgiven rather than just deferred. This makes it a tempting option for employees hoping legislators will erase the taxes and lighten their financial burden, instead of requiring employees to pay them back.

Important Things to Know About Payroll Tax Deferral

The tax holiday is optional and if you choose to use it, there are certain rules you’ll have to follow. Here are the most important things employers and workers should know about how the tax holiday works.

Restrictions

This tax deferral comes with a salary limit per employee. It only applies to employees whose wages are less than $4,000 biweekly or salaried workers who make less than $104,000 per year.

Timeframe

It took effect on September 1, 2020, and ends on December 31, 2020. Employers will still have to pay taxes for this period by April 2021.

This means as an employer, you will need to collect additional social security from employee paychecks between January 1, 2021, and April 30, 2021, which covers the tax holiday period. If you fail to do so, you could incur penalties as described below.

Penalties

If the amount of the deferred taxes isn’t paid by April 30, 2021, penalties and interest will begin to accrue. It’s also important to keep in mind that if an employee leaves the company before the tax is recouped, the employer MAY still responsible for paying this tax. Whether or not employers will be responsible seems to be the largest element of uncertainty around this legislation. We will be following the situation closely.

What Will Happen Next With the Tax Holiday?

If you’ve read about the tax holiday in the news, you may be feeling a bit confused about whether you’ll end up having to repay these taxes. There has been some controversy about it, including scrutiny from employee rights groups and pushback from business leaders

The U.S. Chamber of Commerce and 30 trade associations sent letters to the U.S. Treasury expressing their concern about small businesses using the tax holiday now as a temporary solution, then facing huge tax bills later. This is certainly something to consider as you decide whether to defer taxes.

As it stands now, U.S. employers are waiting to see what happens next. President Donald Trump has indicated that he may postpone the deferred tax due date, but only Congress has the power to waive these taxes completely. So far, the IRS has indicated that it will require employers to repay these deferred taxes unless Congress takes action.

Need Assistance With the Tax Deferral? We’re Here to Help.

If you need more information about using the tax holiday to your advantage as an employer, connect with Complete Payroll today.

Topics: Taxes, Labor law

Written by Complete Payroll

We do payroll, HR, timekeeping and more for employers all over the country from a small, rural town in Upstate New York. And we're constantly publishing articles and other resources to help business owners, HR managers or anyone that helps manage a workforce. Welcome to Payroll Country!

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