Federal Payroll Tax Holiday – Should Employers Stop Withholding an Employee’s Payroll Taxes?

On August 8, 2020, President Trump signed an executive order titled the “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” purportedly providing for a payroll tax holiday for the remainder of 2020. Specifically, this executive order directed the Secretary of the Treasury to “defer [without penalty] the withholding, deposit, and payment of the tax . . . on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020[.]” While this executive order allowed for the deferment of payroll taxes for the remainder of 2020, it did not provide for the elimination of an employer’s obligation to pay these deferred taxes during 2021.

As a result of this executive order, employers may think about suspending the typical withholding of an employee’s portion of payroll taxes owed while the payroll tax holiday is in effect, which would result in their employee’s take home pay being increased by as much as 6.2%. However, before employers implement such an action it is important to consider the possible consequences that may result from a decision to no longer withhold the employees’ share of payroll taxes owed.

First, the executive order explicitly provides that the withholding, deposit, and payment of payroll taxes will be deferred not forgiven, during the period of September 1, 2020 through December 31, 2020. In the absence of an express executive order (or Act of Congress) that deferred payroll taxes will eventually be forgiven, employers will still be responsible for both their share of payroll taxes owed as well as their employees’ share of payroll taxes owed once the payroll tax holiday has concluded. If employers choose not to withhold the employees’ share of payroll taxes owed, they would be obligated to pay that share out of their own accounts if Congress decides not to forgive the payroll taxes that have been deferred during the payroll tax holiday. If employers are unable to pay the full amount of payroll taxes that are owed to the IRS, penalties can include a maximum fine of up to $500,000, plus additional penalties including interest on unpaid taxes as well as up to five years in prison.

As an alternative, employers should consider a policy of continuing to withhold the employee’s share of their payroll tax obligation during the course of the payroll tax holiday. Then, if Congress subsequently determines to forgive the payroll taxes that have been deferred, employers can provide the payroll tax amounts that have been withheld back to their employees without any concern of potential liabilities arising in the future.

Should your company have any questions regarding how it can best respond to this or any other situation that may arise, McNeelyLaw has a team of experienced employment law attorneys that are ready to assist. Call us at (317) 825-5110 to discuss any questions you may have.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

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