The payroll tax holiday was originally introduced to provide relief for taxpayers amid the COVID-19 pandemic by deferring some payroll tax obligations. Workers are eligible for the holiday if they are paid less than $4,000 (before taxes) per bi-weekly pay period. Usually, workers and employers each pay half the total 12.4% social security tax due for each worker, under the executive order however, employers may choose to refrain from withholding the 6.2% from workers for social security, but they must still contribute their own portion for each worker.
The introduction of the payroll tax holiday has caused a lot of confusion and criticism across the United States, with guidance released by the Internal Revenue Service (IRS) specifying that deferred payroll taxes must be paid back by employers between 1 January and 30 April 2021. If the taxes are not paid back during this period of time, interest and penalties will begin to accrue.
Although workers will have extra funds now, it is just a temporary measure and could see them having double the social security tax withheld from their paychecks at the beginning of 2021 in order to pay back the deferred payroll tax. As guidance has been limited on how workers will be expected to repay the deferred payroll tax, many employers have decided to skip the optional payroll tax deferral and continue withholding taxes as normal during the so-called ‘payroll tax holiday’.
Businesses across the US have the choice to participate or not, the Trump administration however, has refused to allow federal employees or members of the military to opt out of the holiday. Although President Trump has the power to defer payroll taxes, it will ultimately be down to Congress to decide whether or not to permanently forgive the deferred payroll taxes. It is being argued by economic policy experts that that deferral will have little to no effect on economic growth this year.
Find more information on US taxes and payroll in our guide to doing business in the USA. Find more information and guidance on coronavirus support measures for businesses, employers, and employees on the activpayroll latest news page.