What are payroll taxes?

Employers are required to withhold taxes on behalf of their employees. They must withhold money based on the number of deductions an employee declares so that by the end of the year, the amount of taxes paid are close to what the individual owes the IRS for the year. Any overpayment of taxes is refunded when the employee files their tax return at the beginning of the next year.

There are different types of taxes that must be withheld. In addition to federal taxes, employers must withhold state and local taxes, Social Security and Medicaid (FICA), andunemployment insurance (FUTA). FICA is calculated at 12.4% of an employee’s income up to $137,000 per year. This means the maximum withholding for a one-year period is $16,440. Employers are required by law to contribute 50% of an employee’s FICA, reducing workers’ obligations to just 6.2% of their yearly income.

What was the purpose of the payroll holiday?

President Donald Trump wanted to give employees an increase in their take-home pay during the pandemic to provide some financial relief to the many who have struggled due to the weakened economy. The payroll tax holiday was a tax deferral that provided participating employees with a boost to their income. It comes with a very important caveat, however. That money isn’t free.

A tax deferral isn’t a gift from the government. It’s a loan. Those who saw their taxes deferred during the payroll tax holiday must now pay these funds back in 2021. The initial repayment period was between January 1 and April 1, but employers are now allowed to withhold the deferred taxes over an extended time period. The IRS won’t begin to penalize employers and their employees until the start of 2022.

Who qualified for the tax holiday?

To qualify for the tax deferrals, employees couldn’t earn more than $4,000 during each biweekly pay period. Eligibility was based on each pay period, so employees who saw their earning drop could qualify even if they were making more money earlier in the year. The deferments were also only available from September 1 through the end of 2020.

Some businesses opted all of their employees into the program automatically, so some people may not have been aware of where their extra take-home pay was coming from. Other companies allowed each employee to decide whether or not to participate. Those who were offered the choice were able to make a more informed decisionand can understand why they’re required to have more money withheld from their paychecks throughout 2021.

Was the payroll tax holiday mandated?

For employees who’ve never heard about the tax holiday, it’s most likely because their employers opted out of the program. When the memorandum was released, it was stated that employers could participate voluntarily. There weren’t any penalties for opting out, nor incentives that would entice businesses to opt in to the program.

Whether a business chose to participate depended on how important it was to provide immediate financial relief to their employees and if the risks were worth the benefit. Many determined that because these were deferrals instead of tax deductions, it may place extra strain on employees’ finances and present risks that weren’t worth it for the employers.

Will there be additional tax holidays in the future?

Since President Trump indicated that his future plans for payroll tax holidays were contingent upon his reelection, there isn’t much information available about whether taxpayers can receive deferments during 2021. While many people could benefit from more take-home pay, Congress and the Biden administration may choose to go a different route to provide financial relief to those who really need it. Because most employers opted out the first time around, its lack of popularity could doom any future iterations of the program.

What is the payroll tax holiday’s impact on employers?

Most employers opted out of the payroll tax holiday, but those that didn’t now have special tax considerations that may impact them negatively. Employees are going to have more money withheld from their paychecks to account for the money they saved during the holiday and this could make it more difficult for them to afford their regular living expenses if they weren’t prepared. The pinch could place a strain on their relationships with their employers.

The way the tax deferments are repaid is different from how normal withholding works. Employers must pay the U.S. Treasury the money that’s owed instead of the IRS. This means if employees leave a company before their debts are repaid, the business is held responsible for repayment. If your business is forced to lay off workers, or you have employees leave your company for different opportunities, this could cause financial harm.

These risks are why many businesses chose not to participate in the payroll tax holiday. Federal employees are facing a different situation because the federal government automatically deferred their FICA taxes and they’re now seeing increased withholding until their owed taxes are paid off entirely.

Will deferred tax repayment be forgiven?

There’s a lot of speculation about whether the federal government will give taxpayers a break and forgive their debts. When President Trump issued the memorandum, he stated that he would provide relief if reelected by forgiving taxpayers’ deferrals, but doing so wasn’t entirely in his power. This is why President Biden may be unable to provide the relief that many federal employees are seeking.

Congress has the true power to forgive the debts incurred through the payroll tax holiday, and it isn’t yet clear whether lawmakers have any intention of passing legislation that would do so. The only relief taxpayers have seen has come via the extension of the repayment deadline, which was enacted in December.

Potential burden on HRIS systems

Some businesses that opted in on the tax holiday are having difficulties managing the related problems presented to their human resources departments. Since no one knows if the deferred payments will be forgiven, they’re forced to do the extra work of withholding taxes while waiting for news. If the federal government decides to forgive the deferrals, all of the money that was withheld may need to be given back to affected employees.

This has created such a logistical nightmare for some businesses because some HRIS providers are choosing not to provide any assistance with the program. This leaves the tasks of withholding and sending payments to the government entirely in the hands of the businesses. Many business owners and management staff are becoming increasingly frustrated with the extra time and overhead that’s required to manage these tasks.

Chances are likely that you’ve got little to worry about if you’re not a federal employee or haven’t been informed about the payroll tax holiday from your employer. If you own a business that participated in the program and have questions about how to handle your tax planning, it’s a good idea to consult with a tax accountant or attorney who can advise you how best to plan in light of not knowing whether or not these payments will be forgiven.