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NCA Alert: IRS Guidance on Payroll Tax Holiday

On August 8, 2020, President Trump announced an executive action to allow employers to provide a tax holiday for their employee’s portion of Federal Insurance Contributions Act (FICA) taxes. On Friday, August 28, the Internal Revenue Service (IRS) issued guidance to implement the Executive Memorandum. It had been delayed as the Department of Treasury determined if there would be a way for the taxes to be waived entirely; but, Treasury came to the conclusion that it would require Congressional approval. As such, if an employer decides to pay the employee his or her FICA tax rate of 6.2%, the employee would still be required to make-up those taxes. Here’s how it would work:

The employer has to decide whether or not it will participate in the program for all eligible employees. If the employer decides to provide the tax holiday, the wages an employee earns up to $4,000 per pay period would not be subject to the employee’s share of social security taxes (FICA) until January 1, 2021. This would increase an employee’s take home pay by up to 6.2% beginning September 1, 2020 through the end of this year. However, the employee is still liable for those taxes, and beginning January 1, 2021 through April 30, 2021, the employer would have to withhold a higher amount of the employee’s share of FICA taxes in order to repay the amount deferred in 2020.

For employers who decide not to participate in the program there are no changes and they will continue to withhold the full amount of the employee’s share of FICA taxes. It is important to note that many businesses and associations have pushed back on the idea given the fact that it only defers taxes due and employees would end up with a large tax bill due on April 30, 2021.

As discussed briefly on NCA’s August 20 webinar, U.S. Chamber of Commerce Lead Economist Curtis Dubay and NCA Vice President of Government Relations Joe Trauger don’t believe this Executive Memorandum on payroll taxes is likely to have much effect on the economy or is likely to be taken up by many businesses. You can see the IRS guidance here.

For additional information, please contact NCA Vice President of Government Relations Joe Trauger at 202-822-9822 or [email protected].