What is a Payroll Tax Holiday and What Are Its Impacts?

Everyone loves a good holiday — they're relaxing, fun, and (usually) stress-free! But not every holiday is synonymous with a vacation or time off from work. A payroll tax holiday is a temporary suspension or decrease of taxes levied on payrolls, salaries, and wages. These are usually imposed during an economic downturn, like a recession. 

Typically, payroll taxes are deducted from an employee's wages or salary by their employer to finance various social programs. Employers withhold these taxes from workers' paychecks and remit them to the appropriate government agencies, like the Internal Revenue Service (IRS).

However, during a payroll tax holiday the government reduces the amount of money employers must withhold from employee paychecks for Social Security, Medicare tax, FICA, and other payroll-related taxes. It’s important to note that payroll tax holidays don’t reduce or suspend federal or state income taxes — only payroll taxes. 

As a human resources professional, there are a few key things to understand about payroll tax holidays. Here’s what you should know. 

What Is the Purpose of a Payroll Tax Holiday?

Payroll tax holidays can help give workers more access to disposable income. The goal is to support the economy during times of economic downturn or hardship by giving workers more money to pay bills, purchase goods and services, or save for the future.

Proponents of payroll tax holidays argue that they can help boost consumer spending, stimulate economic growth, and support struggling workers during difficult times. However, opponents argue that payroll tax holidays can lead to long-term funding shortfalls for essential programs like Social Security and Medicare. They also argue payroll tax holidays primarily benefit higher-income earners who receive a more significant tax break.

Who Imposes a Payroll Tax Holiday?

The federal government is responsible for imposing payroll tax holidays. The decision to impose one requires action from the President of the United States and/or Congress. 

Congress has the power to regulate and modify the tax code, so they must approve any changes to payroll tax rates or schedules. The only time Congress doesn’t need to approve changes is when a sitting president signs an executive order for a payroll tax holiday. In this case, approval from Congress isn’t necessary or required. 

What Does a Payroll Tax Holiday Mean for Employers?

A payroll tax holiday could have several impacts on employers depending on its specific design. 

If the tax holiday results in a temporary reduction or suspension of the payroll tax, employers will have to adjust their payroll systems to account for the change. This could involve reprogramming your systems, updating employee tax information, and communicating with employees about the temporary increase in their take-home pay.

Alternatively, suppose the payroll tax holiday is designed as a deferral of taxes. In that case, employers are still responsible for withholding and remitting the deferred payroll taxes on behalf of employees at a later date. This situation could result in reduced employer cash flow during that period.

It's also worth noting that a payroll tax holiday may not provide significant relief for employers themselves, as the payroll tax is a tax on employee payroll, not on employers. Therefore, any benefits of a payroll tax holiday may be indirect through increased consumer spending and potential economic stimulus.

What Does a Payroll Tax Holiday Mean for Employees?

A payroll tax holiday usually means that employees see an increase in their take-home pay since their employer temporarily stops withholding the payroll tax from their paychecks. This extra money can benefit employees who are struggling financially or need extra disposable income.

Do Employees Have to Repay Taxes from a Tax Holiday?

If the payroll tax holiday is designed as a suspension or deferral of the tax, then it is possible that employees may have to pay back the deferred taxes at a later date. This means that while employees may receive a temporary increase in their take-home pay during the tax holiday, they would be required to pay back the deferred taxes.

However, if the payroll tax holiday is designed as a reduction in the payroll tax rate — either temporarily or permanently — then employees are not required to pay back any taxes. The payroll tax holiday would simply lower the withholding of payroll taxes from workers' paychecks, for a certain time period or indefinitely.

Examples of Recent Payroll Tax Holidays

The most recent payroll tax holiday was in response to the Coronavirus pandemic. President Donald Trump authorized a payroll tax holiday in August 2020 for certain employers and self-employed individuals affected by the COVID-19 pandemic.

Per President Trump's authorization, the IRS issued guidance allowing employers to defer withholding employees' Social Security taxes from September 1, 2020, through December 31, 2020.

President Barack Obama also imposed a payroll tax holiday in 2011 and 2012 during the aftermath of the Great Recession. The tax holiday temporarily reduced the Social Security tax rate for employees by 2% for two years. During this period, employees received a temporary increase in their take-home pay.

The 2011-2012 payroll tax holiday was designed as an economic stimulus measure to encourage consumer spending and support the economy during the Great Recession. President Obama expired the payroll tax holiday at the end of 2012, and payroll tax returned to its previous rate.

Empowering Employees in Every Economy

Payroll tax holidays are a tactic the U.S. government uses to support American workers during an economic downturn. Companies looking to handle lean times can turn to an employee wellness program. Research shows improved worker wellbeing can help your organization by increasing productivity, decreasing talent management costs, and driving healthcare savings. Nine out of 10 companies that track the impact of their employee wellness spending see a positive return on investment. 

If you’re ready to see how a wellness program can support your employees and business, reach out to a Wellbeing Specialist today! 

References

• Bishop-Henchman, J. (2020, August 7). Suspending the Payroll Tax By Executive Order Raises As Many Questions As It Answers. National Taxpayers Union Foundation. Retrieved May 9, 2023, from https://www.ntu.org/foundation/detail/suspending-the-payroll-tax-by-executive-order-raises-as-many-questions-as-it-answers.
• Center on Budget and Policy Priorities. (2022). Policy Basics: Federal Payroll Taxes. Center on Budget and Policy Priorities. Retrieved May 9, 2023, from https://www.cbpp.org/research/federal-tax/federal-payroll-taxes. 
• Konish, L. (2020, August 10). Trump’s payroll tax cut would ‘terminate’ Social Security, critics say. CNBC. Retrieved May 9, 2023, from https://www.cnbc.com/2020/08/10/trumps-payroll-tax-cut-would-terminate-social-security-critics-say.html. 
• Miller, S. (2020, August 31). IRS Guidance Allows Workers a Payroll Tax ‘Holiday’. SHRM. Retrieved May 9, 2023, from https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/irs-guidance-workers-payroll-tax-holiday.aspx. 
• The Hartford. (2022, April 5). The Hartford’s New Study Finds Employers Believe Worsening Employee Mental Health Is Hurting Their Financial Performance. The Hartford. Retrieved Monday May 9, 2023, from https://newsroom.thehartford.com/newsroom-home/news-releases/news-releases-details/2022/The-Hartfords-New-Study-Finds-Employers-Believe-Worsening-Employee-Mental-Health-Is-Hurting-Their-Financial-Performance/default.aspx. 
• U.S. Department of Treasury. (2011). The Impact of the 2011 Payroll Tax Cut on Working Americans. U.S. Department of Treasury. Retrieved May 9, 2023, from https://home.treasury.gov/news/press-releases/tg1029.