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Potential Pitfalls with President Trump's Payroll Tax "Holiday"

September 16, 2020 | by Hugh C. Carlin
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Intended benefits may be offset by unexpected repercussions for both employers and employees

In an effort to ostensibly put more money in the pockets of American workers, the IRS, under the direction of President Trump, issued Notice 2020-65, giving employers the option to suspend the withholding of Social Security payroll taxes beginning September 1 and running through December 31, 2020.

On the surface, this sounds like a solid plan – workers immediately have more cash available to pay bills during this difficult time. But both employers and employees need to be wary –this tax holiday poses a few potential bumps in the road to prepare for.

Employees Beware
Many employees don’t realize this isn’t a chance to skip paying taxes for four months, it is a delay in the collection of those taxes. Under 2020-65, the amount of Social Security taxes collected will increase from January 1, 2021 through April 30, 2021 to make up that tax revenue. In a nutshell, beginning January 1, your paycheck will drop by the amount it will increase by now, so be prepared.

The President has said that if reelected, he will forgive the payback of the taxes, but that involves a lot of what-ifs. What if he isn’t reelected? What if that turns out to be a hollow campaign promise? What if Congress doesn’t sign off on the tax forgiveness? We are advising employees we represent to, if at all possible, put that extra cash aside. If you owe it in January, you won’t suffer the hit, and if it is forgiven, you have a little extra savings to start the New Year.

A Double-Edged Sword for Employers
For employers, there is the matter of withholding. It is an optional plan at the employer’s discretion. Did you decide to pause the collection of Social Security taxes, or is it business as usual for you when it comes to tax collection? Either way, we are advising our employers to be prepared to navigate potential fallout.

If you paused the withholding of Social Security taxes, we advise educating your employees on the repayment rules. You don’t want to be in the position of fielding calls and emails from angry employees when they see their first check of 2021 and it is less than expected. The potential hit on employee morale will be significant.

What if you didn’t pause the withholding because you were concerned about that very issue? Well, that’s fine, unless the government does forgive repayment of the taxes. If, four months from now, employees find out they don’t have to pay the money back, and you didn’t pause the collection, you may have just cost your employees some free cash. Again, we are advising our clients to get out in front of this, and make sure your employees are well-versed in this process to minimize fallout on the backside.

Then there is the issue of employees who leave your organization. If they aren’t here in January, you obviously can’t withhold the extra taxes, so where does that money come from? The IRS guidelines are fairly sparse with details or directions, but it certainly appears that the employer will be on the hook for that cash. 2020-65 says, in part:

An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.

If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.

Once again, this is an issue for employers to consider if you have elected to pause the collection of these taxes.  

If you have additional questions or concerns, our experienced team of labor and employment attorneys are a phone call away, ready to help.

B. Kevin Burke Jr. and Katherine Liebner contributed to this blog.

Hugh Carlin’s practice includes wide ranging federal and state court experience in civil litigation within employment law, environmental defense, class actions, product liability defense, corporate dissolution and shareholder disputes, “business divorce,” breach of contract, OSHA and insurance coverage disputes. He can be reached at 716-854-4300 ext. 240 or hcarlin@gross-shuman.com.

B. Kevin Burke Jr. focuses his practice on the litigation of contract disputes, labor and employment issues, intellectual property protection, and trade secret cases. He can be reached at 716-854-4300 ext. 292 or kburke@gross-shuman.com.  

Katherine Liebner’s focuses her practice in the areas of estate planning, estate and trust administration, and labor and employment law. She can be reached at 716-854-4300 ext. 236 or kliebner@gross-shuman.com.