Our Thoughts: Should You Participate in Payroll Tax Holiday?

Earlier this month, President Donald Trump signed an executive order aimed at creating a “payroll tax holiday.” Under this executive order, the Secretary of the Treasury is:

hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020

Therefore, employers face a choice of whether they are going to participate in the payroll tax holiday. At first glance, this would seemingly put more money in the pockets of employees and allow employers to free up funds for other purposes.

That said, Section 4 of President Trump’s executive order is the reason that most businesses are taking a pause and considering whether they should participate in the payroll tax holiday or operate as business as usual:

Sec. 4. Tax Forgiveness. The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.

This is because, while the President has acted under his emergency powers in light of the pandemic, the President can only defer the payroll tax—only any act of Congress can forgive it.

This has left some commentators advising against participating in the payroll tax holiday. For instance, the Wall Street Journal said that “Employers are wary of the administrative costs and of assuming liability for the taxes of employees who leave their jobs.” The reason for this concern is that it is the employer’s responsibility to collect the employee’s portion of the payroll tax and remit it to the federal government. But, if the employer chooses to participate in the payroll tax holiday, and an employee leaves the company before the funds are withheld, the employer may ultimately have to pay both the employer-side payroll taxes and the employee-side.

For this reason, before your company chooses whether to participate in the payroll tax holiday—or not—it may be worth discussing with your legal and accounting advisors to make sure that you have considered both the risks and benefits associated with either decision.