Executive Order on Payroll Tax Holiday – Effective September 1

The President issued an executive order on August 8 to provide for a payroll tax holiday in order to boost the economy during the current pandemic. The holiday generally applies to employees earning less than $100,000. The payroll tax holiday applies to only the 6.2% social security. Medicare tax of 1.45% is not affected. This payroll tax holiday goes into effect on September 1 (that’s Tuesday!!) However, the deferred social security tax from September 1 through December 31 will need to be withheld between January 1 and April 30 and repaid by April 30 next year, unless Congress votes to forgive it all together. Here is my observation and why the executive order is clear as mud!

  1. First of all, the President exercised the disaster declaration authority under the Internal Revenue Code to accomplish the payroll tax holiday. The law allows the Treasury Secretary to defer the payment of payroll tax but not the waiver of the payroll tax. Therefore, employers still have the obligation to withhold the social security tax from employees unless Congress decides to eliminate the obligation from employers.
  1. Let’s say an employer decides to follow the executive order and an employee leaves the company, it would be difficult for the employer to recoup the amount from the employee and it now becomes the employer’s burden to repay that employee’s portion of the social security tax by April 30.
  1. In a different scenario, let’s say an employer decides not to follow the executive order and withholds social security tax from employees. Later on, if Congress decides to makes this a true payroll tax holiday, i.e. the employee’s portion of the social security is waived, the employer will need to return the withheld social security to the employees. In addition, since this amount now represents additional income to the employees, employers will need to report this additional income and withhold taxes on it. On the employee’s level, they will need to report it on their personal tax returns.

As you can see, each option carries its own risk. In the end, the obligation of funding social security falls on employers. The Treasury Secretary had said that he cannot force companies to follow the executive order but he hopes many will participate. The US Chamber of Commerce has also said that many businesses won’t implement the deferral because of the difficulties in administering it and the greater burden for employers next year.

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