Q: Could you do a quick explainer of this payroll tax holiday we keep hearing about in the news? Is it mandatory? Do you recommend it? What are the pros and cons?
A: Sure.
The payroll tax holiday is part of the government’s effort to provide COVID-19 economic relief, and it is meant to put more money in the pockets of employees by allowing employers to defer collecting the worker’s portion of the Social Security tax from September 1, until December 31.
The rationale behind it is that allowing employees to keep a bigger portion of their paycheck for the last four months of the year it will help them when they need it the most. Sounds reasonable, right? Unfortunately there’s a huge catch.
The catch is that starting January 1, 2021 employees will have 4 months to pay back the tax they were allowed to keep in 2020. So employees would see bigger paychecks during the last four months of this year, but smaller paychecks than usual in the first four months of 2021.
Deferred taxes must be repaid back by April 30, 2021 or there will be penalties and interest. Does that sound like a good idea? Not to me. I’d rather have the same size paycheck for the next eight months, than that roller coaster that leaves you (moneywise) in the same exact spot. No thanks.
Luckily, participation is not mandatory. Not many employers are signing up to participate, and not many employees are requesting it.
Pros and cons
Possible pro for workers – The White House says they’ll try to get the deferred taxes forgiven, which could mean employees get to keep the extra money they received. But that is a long shot, which would require new legislation which doesn’t have full support because it would mean underfunding Social Security –which completely depends on these payroll taxes.
Cons for employers – There is some confusion on what would happen if –after the employer defers taxes in 2020- if the employee leaves their job in 2021 before paying back the taxes. Are employers protected or are they stuck with the tax bill? Uncertain.
Cons for federal workers – Unfortunately for the 1.3 million federal workers in the US government, participation appears to be mandatory. They are expected to see across-the-board payroll tax deferrals starting in mid-September, forcing workers to take a temporary financial boost that they will be responsible for repaying next year.
In case it was unclear, I would not recommend employers offer this payroll tax holiday to their workers. And to employees, if you are offered this option, turn it down unless you are confident you can pay everything back in time.
For more info go to https://www.irs.gov/pub/irs-drop/n-20-65.pdf
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