How Will COVID-19 Affect Your 2020 Payroll Taxes?
The coronavirus pandemic has had an enormous financial impact on businesses. Steep revenue losses across numerous sectors meant many small businesses have struggled to keep themselves afloat and cover basic expenses like employee salaries.
The U.S. government has responded to these economic hardships with policies designed to help American workers, including a temporary “payroll tax holiday” for certain employees beginning September 1, 2020.
If you or your employees are taking advantage of this policy, you may be wondering how it will impact your 2020 payroll taxes. Here’s what you need to know.
How does President Trump’s ‘payroll tax holiday’ work?
On August 8, 2020, President Trump used executive action to institute a temporary cut of the 6.2% Social Security payroll tax for qualifying employees from September 1 through December 31, 2020.
This “cut” is not an elimination of said payroll taxes, but a deferral — employees will be responsible for meeting their tax obligations during the first four months of 2021, unless Congress passes legislation to permanently forgive the payroll tax cut. In essence, employees who take this “payroll tax holiday” should plan to receive a higher paycheck for the remainder of 2020, but see a significant cut to their pay between January and April of next year.
For employees, the temporary increase in pay could help cover some much-needed expenses in the short-term, especially if a spouse or family member is currently unemployed. However, they will need to plan ahead to ensure they are able to pay back their obligation in early 2021, in case Congress does not forgive the tax cut.
What does this mean for employers?
It’s important to note that employers must opt in to this payroll tax holiday, and the government has not made it mandatory. Keeping track of everyone’s deferred payroll taxes and holding those payments in escrow until early next year is complicated, and it could prove to be a logistical nightmare.
It’s a difficult choice, especially since, if Congress doesn’t forgive the tax cut, an employer is on the hook for the employee’s tax obligation if they leave the company or otherwise don’t pay it back by the end of April. However, it may be in an employer’s best interest to extend the option to their employees.
With everything going on in the world, it’s the right time to give more money to an employee, and if your company has the resources to shoulder the bookkeeping burden and risk, it could go a long way in building employee loyalty and satisfaction.
Have questions? Ask a trusted CPA.
The top-rated CPAs at Miller and Company LLP are here to answer all your questions about 2020 payroll taxes and how the current administration’s policies might impact your tax return for the year. Contact us to schedule a consultation with one of our trusted accounting professionals.