President Trump issued an executive order allowing employers to defer OASDI taxes from September through December of 2020, now being called the payroll tax holiday. Some are celebrating the policy while others are worried about getting hit with big deferred tax bills. What does it mean for your business? Let’s unpack it a bit…
What is OASID tax?
Old Age, Survivors, and Disability Insurance is a 6.2% tax paid by your employees but collected by the business. The potential benefit is for your employees, while the burden of implementation is on you, the employer. If you’re thinking that’s unfair, just remember all that free PPP money you got earlier in the year.
What is the payroll tax holiday?
Starting 9/1/2020 until 12/31/2020, employers are not required to withhold and pay this tax for employees earning less than $104k/yr. (more on this detail later.) Instead, these taxes will be remitted between 1/1/2021 and 4/30/2021. To the employee, that means they get to keep 6.2% more of their pay for the last 4 months of 2020, but then pay double-taxes for the first 4 months of 2021. Why would they want to do that? Basic finance theory: money now is always better than money later. That extra cash could make a big difference to a household where one family member lost a job. For someone earning a median income the total tax deferral amount would be $1,280 – roughly the same as the Covid-19 stimulus check.
How should I change my payroll process for the tax holiday?
First we must state that there are many unanswered questions. If we use the PPP regulations as our guide, we can expect guidance to change frequently over the coming days.
Initial guidance from the White House is this deferral is optional. IRS guidance does not make it clear if that’s optional to the employee or employer. Typically the IRS is never opposed to receiving tax payments early, but will businesses be forced to offer this deferral to their employees? Not yet, but let’s wait and see.
If you do decide to take advantage of the deferral, reach out to your payroll provider to find out how to accommodate the process. Full service payroll companies (e.g. Gusto) make it easy to check off which employees elect the deferral. If you run your own payroll, then you are facing some additional complications (note: in the past 3 years I’ve never seen the cost/benefit analysis favor internal payroll processing. You should really switch to a PEO or full service payroll provider.)
Strategic salary changes
For most businesses, the deferral amount is too small to justify major salary shifts. But consider this: Trump suggested the deferral become permanently forgiven, although he does not have the power to do this (it would take an act by congress.) If you want to wager that congress eventual passes the forgiveness or you really want that extra 6.2% right now, you might consider changing your salary structures to accommodate the deferral.
The deferral is only available for anyone earning less than $4000 every 2-weeks (or $4,333.33 twice monthly or $8,666.67 every month.) For your executives earning more than $104k, you might consider restructuring their pay to be $104k base plus an end-of-year bonus or commission, making your regular paychecks fully eligible for the deferral.
Final payroll tax holiday considerations
Remember: stimulus is no replacement for sound financial strategy. If you find yourself spending many hours contemplating what to do about this tax holiday, you need to drop it and focus on more important Covid-19 planning, like building a forecast. If you find yourself really lost and want some help, schedule a call and we’ll help you out.