Should Your Small Business Participate in the Payroll Tax Holiday?

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With large-scale COVID-19 relief currently stalled, it was announced on August 8, 2020, that the collection of payroll taxes would be deferred. In theory, this will allow employees to keep more of their paychecks, therefore making more money available to stimulate the economy. 

Unfortunately, as with most of the COVID relief, the specifics of the deferment have been somewhat vague. Let’s dive into the details of the executive order and if it makes sense for your business to participate.

What is the Payroll Tax Holiday?

The Payroll Tax Holiday refers to the pausing of tax collection for the employee portion of payroll tax that funds social security, for those that currently make less than $104,000 annually. This represents roughly 6.2% of an individual’s paycheck, and the holiday is currently scheduled to run from September 1 – December 31, 2020. 

Should my business participate in the Payroll Tax Holiday?

The nature of the holiday is the simple part. It’s all the questions that come after that make this relief measure far more complicated. Here are some elements of the holiday you’ll want to consider before deciding to participate.

There is currently no repayment plan in place

After December 31, 2020, the deferred taxes will need to be repaid. The president has instructed the Treasury secretary to explore avenues of forgiveness, but as of right now no legislation to do so has been produced. 

Additionally, the steps for repayment haven’t been outlined, meaning that it could need to be paid all at once, incrementally over 2021 or through some other method.

Your employees may be stuck with large tax bills in 2021

The lack of a clear repayment schedule or Congressional forgiveness could make this deferment a hefty liability for your employees. Sure, they may have a bit more cash in their pockets right now, but that could all stack up into a large tax bill early next year. If you do plan on having some employees participate in the break, it may be worth advising them to set a certain amount aside so they can manage the payment later on.

Your business may be liable for underpaying the treasury

Adjusting payroll tax collection can be a complicated process. Add in the fact that it’s occurring mid-year, within 1-month, and involves only employees under a certain pay threshold, and the potential for mistakes escalates. 

This may lead to your business being liable for unpaid taxes in 2021. You’d likely then have a larger tax bill or even suffer penalties for missed payments. 

Additionally, if any of your employees don’t repay their deferred taxes, your business may be held responsible. Meaning that on top of potential issues with your own business taxes, you may also find yourself paying for the missing taxes of your employees.

Our recommendation for small business owners

In short, the Payroll Tax Holiday may bring more potential risk than it’s worth. The amount of money that actually ends up in your employees’ pockets is fairly minimal, but the potential bill early next year can be substantial. 

If you’re a small business owner, we recommend that you sit tight and not jump into leveraging this tax holiday. Instead, try the following:

Talk with your employees

Start an open discussion with your employees regarding the nature of this relief effort. Outline the risks involved and why you likely won’t be having them participate. Having an open dialogue will allow your employees to be more aware of the situation and mutually come to a decision.

Afterward, invite individual employees to schedule a time to discuss the holiday. If they feel that it could benefit their current financial situation, leave the option open, and work through how it could affect them long-term. 

Stay informed

Like the original CARES Act and all of the changes to the application and forgiveness process for PPP loans, nothing about COVID relief is set in stone. While the tax holiday may not make sense for your business in its current state, there is potential for it to change in the coming months. Stay informed and keep an eye out for alterations to relief legislation, so if/when it is time to participate, you’re ready to do so.

Revisit your budget and financial forecasts

We’ve mentioned this process throughout the crisis, but revisiting your planning and financial documents is crucial. If you’re considering leveraging the tax holiday, you’re likely still looking for ways to help your business cut costs, improve cash flow, and keep your employees on

If you haven’t done so recently, now is the time to adjust your forecasts and run new scenarios. Compare them and your actual results through the crisis so far, to the crisis plan you created during the onset of COVID-19. Identify what’s worked, if your results were on track and if there are any areas of your business ripe for improvement or cutting.

In a crisis, planning matters more than ever. If you’ve found success and are on your way to recovery, keep looking for more opportunities. Things can change at a moment’s notice and you want to be sure you’re anticipating multiple scenarios and firmly understand the state of your business. 

Resources that can help you plan and forecast

If you’ve been struggling to maintain and update your planning documents we recommend a tool like LivePlan to make the budgeting and forecasting simple. But we’ve also got plenty of other free resources to help you:

Sales Forecast Template Download: Use our free Excel template to work on your sales forecast. If you’re starting or running a subscription or SaaS business, we have a template for that too.

Income Statement (P&L) Download: Another free Excel template that will help you create an expense budget and measure your profitability.

Cash Flow Template Download: Forecasting your cash flow is important when your business situation changes. If you’re going to face a cash crunch, plan for it and get financing or an SBA-backed loan in place sooner rather than later.

A simple one-page business plan template: If you have an idea for a new business, use this simple one-page template to plan out your idea. It’s much easier and faster than a traditional business plan.

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Kody Wirth
Kody Wirth
Kody currently works as the Inbound and Content Marketing Specialist at Palo Alto Software and runs editorial for both LivePlan and Bplans, working with various freelance specialists and in-house writers. A graduate of the University of Oregon, he specializes in SEO research, content writing, and branding.
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