UPDATE – Aug 12, 2020: US Secretary of the Treasury Steve Mnuchin indicated that the payroll tax deferral would not be mandatory for employers to implement and will be up to employers. Suggesting “we can’t force people to participate”.
President Trump signed an executive order to try and address the economic crisis caused by the pandemic. One of the provisions his executive order indicates is to stop payroll tax obligations for those making less than $100,000 a year from Sept. 1, 2020 to Dec. 31, 2020. This ‘payroll tax savings’ is the employee and employers 6.2% for Social Security and 1.45% for Medicare payroll tax contributions paid with each paycheck.
The Potential Problem
This executive order deferred these payroll taxes – it does not eliminate them. An executive order does not have the power to eliminate payroll taxes therefore President Trump’s order alone cannot waive the tax debt owed by employers on wages they pay their employees. It would require a vote by Congress to make these deferred taxes considered forgiven.
A Larger Potential Problem
As a result under the current law, a payroll tax deferral would mean a large tax bill if Congress does not agree to forgive these taxes when it becomes due. Although President Trump expresses his desire to eliminate the deferred taxes if he’s re-elected, there’s no guarantee that these payroll taxes will be avoided if a bill is never passed by Congress itself. For a business owner, that would mean having to come up with paying the 15.3% of taxable wages, whether or not originally withheld from employee’s paychecks.
Our Take: We recommend to continue withholding payroll taxes from your employees, and reserving the employer portion, in a savings account. If Congress chooses to call this tax due, business owners who did not withhold payroll taxes from their employees would either have to request this tax from its employees at that time, or choose to pay the 15.3% payroll taxes themselves.
A business owner’s best case scenario: If Congress does in-fact forgive this ‘payroll tax holiday’, then this payroll tax can easily just be refunded back to your employees at a later date.