On August 8th, President Trump sent a memorandum to the Treasury Department allowing for a tax holiday. The tax holiday allows for employees earning less than $104,000 per year to defer paying their Social Security taxes during the months of September through December. This would save employees 6.2% of their income for these four months.
Sounds like a win, right? Not really. At this point, employees will still need to pay the taxes; they will just have to do it after the first of the year.
Employers have the option of offering the tax holiday, or not. We recommend not offering this option to employees based on the following:
• Implementing this would be a hassle for employers as most payroll systems are not designed to offer tax holidays, track deferred taxes, and then calculate and collect make up contributions in 2021.
• Unless legislation is passed to “forgive” the tax holiday, employees would need to repay the deferred taxes by the end of April 2021. The likelihood of new legislation being passed in a timely manner during the height of a presidential election cycle is remote at best, so employees should be prepared to repay the taxes.
• Under the current plan, if an employee chooses to defer taxes and then leaves the company at the end of the year, the employer would be stuck with repaying those taxes.
Even with this, you might be thinking that it could be worth the risk to employers to offer this opportunity to save employees money right now. Maybe, but doubling up on tax expenses right after the first of the year when many employees already have a credit card hangover from the holidays is likely to cause more harm than good.
There is still a way to help your employees who are struggling financially. Instead of offering a temporary tax deferral, what you can do is offer employees personal financial training/counseling to help them manage their earnings on an ongoing basis.
If you can afford it, a year-end bonus for surviving 2020 isn’t a bad idea either.