Important Payroll Tax Holiday Beginning 9/1/2020

Three weeks ago many of your employees started inquiring about when you were going to stop taking their payroll taxes out and you likely told them you were awaiting guidance and nothing would happen until September 1^st.  Guess what?? It’s September 1st and employees are starting to ask again.  The big picture they need to know is that it’s a temporary delay not a permanent cut. 

Late Friday (8/28), the Department of Treasury released some guidance.  Many questions remain unanswered, like, can we simply decline to participate in the deferral or what if an employee leaves before they’ve repaid the deferred taxes?  The guidance doesn’t provide us an option to not participate and states the employer “may make arrangements to otherwise collect the total Applicable Taxes from the employee”….. which means they’ve never tried to collect money from a terminated employee!  

That being said, we will do the best we can with the information provided thus far.  Most employees don’t understand that this is a deferral or delay of taxes, not a permanent cut, for employees making $104,000 or less annually. All delayed taxes would need to be repaid by the end of April 2021.  Meaning, while most employees would have the chance to get a 6.2% boost in their paychecks for the last 4 months of this year, this could cause them to get slammed with a 12.4% withholding for the first 4 months of 2021.  The concern is that once employees get accustomed to the increase in pay, the double down approach to collect at the beginning of the new year may cause them undue financial stress.    

The tax deferral has the potential to cause more aggravation and confusion among staff than its worth, so we recommend the opt out approach.  The guidance doesn’t provide employers the option to not offer to their employees and we know plaintiffs’ attorneys are always looking to make a quick buck, so we recommend providing employees with the information and let them make an informed decision.      

We have drafted a sample letter that you may wish to share with staff to explain the deferral and requires them to complete and sign paperwork to defer their tax for the remainder of 2020. The letter also states that nothing will change on their withholding unless they choose to opt in to the tax holiday.  Please contact our office if you would like a copy of this sample letter. 

IRS Issues New Form W-4 and Updates Tax Withholding Calculator

At the close of February, the IRS released an updated tax withholding calculator on IRS.gov and issued a new Form W-4 Employee’s Withholding Allowance Certificate.Employees can use the online calculator to check their 2018 tax withholding following passage of the Tax Cuts and Jobs Act in December 2017. If employees choose to adjust their withholding, they can now complete and submit the revised Form W-4 to their employer.

The IRS also posted new Withholding Calculator Frequently Asked Questions.

The IRS encourages employees to check their paychecks to help ensure they’re having the right amount of tax withheld for their personal situation. The Tax Cuts and Jobs Act made changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions, and changing the tax rates and income brackets.

The IRS is not requiring employers to obtain new W-4s from their employees, as it revised the withholding tables to function with the old W-4 for 2018.  However, businesses should notify employees that using the withholding calculator at IRS.gov and, if necessary, submitting the new form W-4 to their payroll department may result in more accurate withholding for the 2018 tax year.

Fine-Tuning Withheld Taxes
In January, the IRS released updated income-tax withholding tables for 2018 that reflected changes made by the tax reform law. The IRS instructed employers to begin using the 2018 withholding tables as soon as possible but no later than Feb. 15. However, because of the significant changes in the new tax code, employees may want to ensure that their current withholding is appropriate. Many employers may have already received inquiries, and now they can direct staff to the new 2018 W-4.

The new W-4 instructions state that if you use the withholding calculator, you don’t need to complete any of the worksheets for Form W-4. This was not stated on the previous W-4 and may indicate that the withholding calculator is the most reliable method to get taxpayers’ withholding closer to their tax liability.

The withholding changes do not affect 2017 tax returns due this April.

Withholding issues can be complicated, and the calculator is designed to help employees make changes based on their personal financial situation.  By encouraging employees to take a few minutes can help them ensure they don’t have too little—or too much—withheld from their paycheck.

A ‘Paycheck Checkup’
By checking their withholding, employees can avoid facing an unexpected tax bill or penalty at tax time in 2019, or prevent having too much tax withheld, the IRS said. With the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks.

Employees with simple tax situations might not need to make any changes, the IRS advised. Simple situations include singles and married couples with only one job, who have no dependents, and who have not claimed itemized deductions, adjustments to income or tax credits.

Employees with more complicated financial situations, however, might need to revise their W-4 to make sure they have the right amount of withholding. Among those who should check their withholding are employees who:

• Have two incomes or are in two-income families
• Work only part of the year
• Have dividends or capital gains from securities held in taxable accounts
• Claim the Child Tax Credit, the Earned Income Tax Credit or other credits
• Itemized deductions in 2017
• Have high incomes and more complex tax returns

When using the IRS withholding calculator, employees will need to have their latest pay statement handy, as they will be asked to enter the federal income tax withheld from their last salary payment and the total federal income tax withheld to date in 2018. If employees follow the recommendations at the end of the calculator and change their withholding for 2018, remind them to recheck their withholding at the start of 2019 because a withholding rate adjusted in midyear 2018 will have a different full-year affect in 2019.

Lower Withholding & Bigger Paychecks Help Employees
A mid-February spot survey  polled 1,000 workers who reported that the new withholding rates for 2018 had increased the amount of money in their paycheck. The results showed:

• Take-home pay after taxes rose by 3.5 percent on average, with an average paycheck growing by $130.76.
• 35.7 percent of workers are using the tax savings to pay down debt.
• 12.8 percent are increasing their retirement savings.