September 30, 2022

Since September 2020, the words “”payroll tax holiday” have been going around. At that point, you probably wondered, “What is a payroll tax holiday?” We will break that down here.

Whether the payroll tax holiday affected businesses at all depended on if the business decided to participate in the tax holiday. Of course, federal businesses took part in observing the tax holiday for their eligible employees. As for the private sector, however, many employers decided not to participate. Their reasons for non-observance were as much for their employees as to benefit themselves, but first,: a review of the payroll tax. 

What Was the Payroll Tax Holiday?

To lighten the economic burden of the coronavirus pandemic, former president Donald Trump signed the payroll tax deferral into effect in the beginning of September 2020. The payroll tax holiday was a temporary suspension (or deferral) of the taxes that employees would have normally paid toward Social Security. It was in effect from September to the end of the year. During this time, employees received over 6% more than their typical wages, since this tax allotment was temporarily waived for participating employees. This means that from September to the end of December 2020, participating employees saw a short-term boost in their take-home pay.

Beginning in January 2021 and through April 30, however, employers were expected to pay the Social Security taxes back. From May 1 on, employers will be expected to pay penalties, interest, and additions to tax if they are unable to withhold and pay those deferred taxes.

Who Was Affected by the Payroll Tax Holiday?

There were some requirements for the payroll tax holiday. Only those employees who made less than $4,000 biweekly (or less than $104,000 yearly) were eligible to participate in the tax holiday. Employers were not required to participate in the payroll tax holiday if they didn’t want to —– the large exception being the federal government. Since the tax holiday wasn’t mandated, the only people affected by the tax holiday were those in the federal sector, and, within the private sector, the employers who wished to participate and their employees. 

Not Without Critics

Many accountants and businesses criticized the plan, pointing out that it unnecessarily complicated matters for both employers and employees. While some employees may have appreciated having that extra 6.2% of their checks back at the end of 2020, the hit to their post-holiday paychecks in January-April 2021 (when most consumers are already struggling) was ill-timed. In addition to the burden on employees (who had to see 12.4% or more of their paychecks go to Social Security those months), the cost of compliance was great for employers as well. Since businesses were expected to pay those amounts back, many feared what would happen if employees left the company.

The “solution” of a contract stating that employees would pay back the amount if they left was unappealing to most employers, since suing employees would, in many cases, cost more for the employers than it would to eat the cost themselves. Business owners were also assured that the deadline would be moved back a year in such cases. Still, many were simply unconvinced.

Since the plan required that only employees who made a certain amount of money were eligible, this also meant an accounting nightmare for companies who would have to factor in bonuses, commissions, stock options, etc. to determine eligibility for their employees. It would have taken a sizable payroll department to calculate all of those costs and determine eligibility on an ongoing basis. Most employers don’t have large payroll departments and choose to outsource payroll to a third party instead. Furthermore, many third- party payroll companies refused to provide the service altogether, making the tax holiday option a nonstarter for many businesses. 

Not Over Yet – Implications for Business Owners

For most people, the payroll tax holiday is a thing of the past. Those who chose not to participate were hardly affected by it at all. Employees whose paychecks were bolstered pre-2021 and suffered at the beginning of 2021 are now back to their normal take- home pay starting this month, and things should have calmed down for businesses that participated in the tax holiday but were compliant and careful to follow all the requirements.

However, for business owners who chose to observe the payroll tax holiday and were unable to pay the full amount due the U.S. Treasury, there are major consequences ahead. 100% of payroll tax penalties are owed by employers. There are several horror stories involved with those who have been deemed “responsible parties” by the IRS, and were thereby required to pay back taxes. 

The severity of consequences for failure to pay payroll taxes depends on the judgments made by the IRS or the U.S. Treasury. In instances of nonpayment, the IRS can seize bank   accounts, accounts receivable, inventory and business assets to satisfy the unpaid amount. In addition, responsible parties are obligated to pay 100% of the unpaid payroll tax, including penalties and interest. What this means is that employers can ultimately be held responsible for double the amount owed, – a $5,000 penalty for $5,000 in unpaid taxes. Those are just the civil   cases. In cases where the IRS determines that the failure to pay is tax evasion, employers face criminal penalties, including a fine of up to $500,000 and up to fgive years in prison in addition to the aforementioned fees and penalties.

Guidance for Noncompliant Business Owners

Time is of the essence for any business owner who has been unable to comply with payroll tax holiday requirements. It’s imperative that businesses have thorough records and documentation to show that the noncompliance was no fault of their own or to document extenuating circumstances. Tax attorneys specialize in negotiating with the IRS to secure payment plans, lower payments and get better terms for the settlement.

They can stop tax liens from being held against business owners, thereby allowing business owners’ credit scores to be unscathed. For this reason, non-compliant business owners should find a tax specialist who is experienced and stays up-to-date on all tax laws immediately. 

The good news? Now that you understand what the tax holiday entails, you can better prepare your employees, while also knowing what to expect yourself.

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