Key Points from Treasury Department Payroll Tax Holiday Guidelines

The U.S. Treasury Department today released guidance on the payroll tax holiday established by President Trump’s executive order of August 8. Here are the key points from the short (2-1/2 page) guidance:

  • The deferral is effective from September 1, 2020 through December 31, 2020. The taxes not withheld or paid in that time frame are due during the period January 1, 2021 through April 30, 2021. Interest and penalties will begin to accrue on May 1, 2021.

  • The tax affected is the Social Security portion (6.2%) of the payroll tax. Medicare tax (1.45%) would still be collected. Additionally, the holiday only applies up to $4,000 of wages per biweekly pay period, or the equivalent amount for other pay period bases.

  • All employers who collect payroll taxes are defined as the “Affected Taxpayer” and thus eligible to participate (and make the decision as to whether to participate). Employers, however, are the entity liable for payment, interest, and penalties. The guidance does state that employers can collect from the employees, but the terms “necessary” and “arrangements” are vague: “If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.”

  • Footnote 2 of the notice states that taxes must be deposited with the federal government when withheld, so employers cannot withhold now and pay later. Only the withholding deadline is postponed.

  • The notice does not address the inconsistencies with 26 U.S.C. § 3102(a), which requires tax to be deducted “as and when” wages are paid, or with 26 U.S.C. § 3102(f)(2), which makes employees liable for the tax if the employer does not pay.

Essentially, the Treasury Department seems to be encouraging employers to stop withholding now through the end of the year, and then double withhold for the first four months of 2021. For example, imagine an employee who makes $1,500 gross pay per biweekly paycheck. They have been having $114.50 withheld for payroll taxes. That would drop to $21.75 through the end of 2020. Then after that, $207.75 would be withheld.

As we observed earlier this month, employers are unlikely to participate in such a holiday as it has been laid out. A payroll tax delay or reduction might be worthy of consideration as a way to reduce the tax burden associated with employment, but its path would be infinitely clearer if it was mapped out by Congress in statute rather than in an executive order.