Get Ready For a Tax Holiday
It looks like many of us may be getting a government-paid holiday soon. And it’s not one with Chevy Chase and the rest of the gang. No, we’re going on a Payroll Tax holiday – enacted by our President by way of executive order on August 8th.
President Trump signed a handful of executive orders. They’re intended to give Americans some additional financial relief from the current Coronavirus pandemic. One of those orders is a Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. This memo instructs the US Treasury to defer collecting employee FICA contributions through payroll beginning on September 1st and ending at the end of the calendar year. If you don’t know that FICA is, it’s part of those pesky withholdings that show up on your pay stub each paycheck. They typically say Medicare and Social Security. Most Americans lump these withholdings into the “Taxes” bucket, grumble about how taxes are too high, and then go on with their lives. But this payroll tax holiday may require a little more finesse, interaction, and education on behalf of employers and employees when it comes to their paycheck.
We’re still waiting on updated Treasury guidance on how this payroll tax holiday will be carried out. But what we do know is that as of right now this is only a deferment and not a gift. So any payroll taxes that employees don’t pay via payroll will have to be paid back at some point (barring any future actions by Congress).
What We’re Recommending
Given that there’s bound to be some confusion around this executive order, we’re recommending that payroll administrators and HR professionals take the following steps:
1. Identify employees who make an approximate annual wage of $104,000 (or $4,000 bi-weekly).
2. Communicate with these employees. Tell them they may see an increase in their take home (net) pay between September 1st through the end of the year. This may involve explaining FICA taxes (which is the combination of Medicare and Social Security that both employees and employers pay), gross pay vs. net pay, and paycheck withholdings.
3. Payroll Systems should be properly calculating and/or deferring FICA withholdings effective September 1 through December 31, 2020. Bi-Weekly Payrolls will see the first change on Either September 4th or September 11th. Semi-Monthly payrolls will see the first change on the September 15th payroll. While you’re at it, check out our Payroll Checklist to make sure you’re running rock-solid payrolls each cycle.
4. Encourage employees to set aside that additional take home pay in a separate account. You can do this by encouraging employees to use prior FICA calculations to determine the monthly amount.
The way we see it, if that money has to be paid back, we want to make sure that employees aren’t surprised by that announcement. And if that money doesn’t have to be paid back (by way of Congressional action) then at least the employee will have a small nest egg in their account to do what they want with it.