Analysis of IRS Guidance for President Trump’s COVID-19 Payroll Tax Holiday

Following the failure of Congress to pass the most recent round of COVID-related economic stimulus, which has still not occurred, President Trump, by executive order, postponed the collection and remittance of Social Security taxes withheld from employees’ checks. This Social Security tax amounts to a 6.2% withholding from the employees’ pay, which is matched by the employer, for a total of 12.4%.

On August 28, 2020, three days before the executive order became effective, the IRS published a brief guide outlining the method, scope, and timeframe for repayment of the postponed withholding – which, while delayed, is still ultimately due unless Congress forgives repayment.

As to scope, the Social Security tax holiday applies to all pay dates between September 1, 2020, and December 31, 2020. Further, on a bi-weekly pay period basis, the tax holiday applies to any employee paid less than $4,000.00 for each specific pay date. Evaluation of applicability is to be completed for each pay date – meaning pay for one pay date does not determine applicability for another pay date. For example: if John is paid $5,000.00 on October 1, but is paid $3,000.00 on October 15, the tax holiday applies to the October 15 pay date, but not October 1.

Importantly, all deferred Social Security taxes must be repaid in the first four months of 2021 through pro-rata allocation of any and all taxes that should have been withheld between September 1 and December 31.

How it will be in 2021

Many commentators have noted that, if current guidance holds, employees will experience smaller paychecks during the first four months of 2021 to repay the deferred tax. Additionally, as is typically the case, the employer is liable for any Social Security tax not paid – meaning the employer is responsible for the tax deferral for all employees, including those that leave the company prior to a repayment.

Critically, the IRS guidance does not include an enforcement mechanism for employers deciding to continue traditional withholding. As such, employers should carefully consider the impact of either undertaking the Social Security tax deferral or not. Relatedly, employers should counsel employees as to the benefits and risks of utilizing the tax holiday – specifically, the pay reduction in the first four months of 2021 that will lower employee checks.

While the IRS guidance implies that the employer has the ability to elect to defer employees’ Social Security tax, the employee does not appear to have any right to force the employer to defer the tax. With that said, in the event the employer elects to participate in the tax deferral program, an employee “opt-out” election is not expressly prohibited or otherwise addressed.

If you additional questions or need assistance counseling your employees on the ins and outs of this tax deferral program, please contact our office here.