In times of economic crisis, Congress has a tool they turn to from time to time: a payroll tax holiday.
While payroll tax holidays can come in different forms, they typically suspend or defer certain payroll taxes, such as Social Security and Medicare, for a limited time. This can help employers facing cash flow problems avoid layoffs and allow workers to keep more of their paychecks.
But what does a payroll tax holiday really mean for small businesses? Here’s everything you need to know.
Payroll Tax Holiday Explained
In response to the coronavirus pandemic, lawmakers instituted two payroll tax holidays—one for employees and one for employers and self-employed workers.
The Payroll Tax Holiday for Employees
President Donald Trump enacted a payroll tax holiday for workers via executive order. This payroll tax cut required the Treasury to allow employers to suspend collecting the Social Security portion from employee paychecks from September 1, 2020 through December 31, 2020.
However, the tax holiday wasn’t a freebie. In fact, it was more like an interest-free loan from the federal government to American workers that would have to be repaid.
Originally, the federal government required participating employers to increase withholdings from their employees’ wages to repay the deferred payroll taxes between January 1, 2021 and April 31, 2021. However, the Consolidated Appropriations Act of 2020 extended the repayment period through December 31, 2021. If employers do not repay the deferred taxes by then, the IRS will start accruing interest and penalties on the balance due on January 1, 2022.
There are a couple of other important things to note about the 2020 payroll tax holiday. First, it applied only to employees whose wages were less than $4,000 for a biweekly pay period. That covered salaried employers earning less than $104,000 per year.
Second, the payroll tax holiday was optional for all employers except the federal government, and many chose not to participate. In fact, many large companies and state governments issued statements announcing they would not participate in the payroll tax holiday due to the burden it would place on employees to pay back the deferred amount in 2021 and the challenges it would pose for payroll systems and departments.
The Payroll Tax Holiday for Employers
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed companies to defer paying the employer’s share of the Social Security tax on employee wages for up to two years.
Amounts normally due between March 27, 2020 and December 31, 2020 could be deferred. Employers must repay 50 percent of the deferred amount by December 31, 2021, and the remaining amount by December 31, 2022.
Self-employed people could also defer 50 percent of the Social Security portion of their self-employment taxes for the same period.
Did You Take Part in the 2020 Payroll Tax Holiday?
Not sure whether you took part in the payroll tax holiday? Here are tips for employees and employers.
For Employees
If you’re an employee and not sure whether your employer deferred your Social Security payroll taxes, the easiest way to find out is to ask your employer’s human resources or payroll department.
You can also check your 2020 pay stubs. Normally, the employee portion of FICA is 7.65 percent of your gross earnings, with 6.2 percent going toward Social Security and 1.45 percent toward Medicare tax.
If your employer took part in the payroll tax holiday, your employee’s share of FICA for September through December 2020 would be only 1.45 percent.
You may also have noticed a drop in your take-home pay in 2021 when the program ended.
For example, if you earned $4,000 bi-weekly during 2020 and your employer decided not to withhold 6.2 percent in payroll taxes, you could have received $248 more per paycheck. However, once the payroll tax holiday ended, your employer would have to withhold and pay all deferred taxes PLUS your regular payroll and income taxes due for 2021.
While there was some discussion of forgiving the repayment of the deferred taxes, Congress did not make that part of their year-end tax bill, instead choosing to stretch the repayment period out over 12 months instead of four. The Biden administration also did not attempt to forgive the deferred amounts, which would have given federal employees (and workers of the few companies that participated in the payroll tax holiday) a tax cut that most American workers did not receive.
For Employers
If your company decided to participate in either of the 2020 payroll tax holidays, you must have decided back in 2020 when they were announced.
Repayment of the employee’s portion of the deferral started on January 1, 2021 and continues through the end of the year. Keep in mind that repaying the deferred amounts is the employer’s responsibility. So while you could increase withholdings in 2021 to pay the deferral back, if the employee has since left the company, you’re responsible for repaying the employee’s payroll taxes.
According to the IRS, the employer can try to “collect the employee’s portion using their own recovery methods.” That could involve taking the funds from the employee’s last paycheck or sending former employees a bill.
To repay both the employee payroll tax holiday and the employer payroll tax deferral, you can make payments via EFTPS, credit or debit card, money order, or check. The IRS requires you to make those payments separately from other federal tax payments to ensure they’re applied to the deferred payroll tax balance.
If you don’t repay the deferred taxes by the due date (December 31, 2021 for the employee portion and December 31, 2021 and 2022 for each half of the employer payroll tax deferral), the IRS will start charging penalties and interest.
Can Employers Defer Payroll Taxes in 2021?
No. Both the employee payroll tax holiday and the employer payroll tax deferral ended as of December 31, 2020. In 2021, employees and employers have to start repaying the taxes deferred in 2020.
The History of Payroll Tax Holidays
President Trump’s payroll tax holidays weren’t the first of their kind. In fact, there have been a handful of payroll tax deferrals in the last several decades.
The Great Recession
In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act temporarily reduced the Social Security contribution rate for employees and self-employed workers by two percentage points. This brought the Social Security rate for employees from 6.2 to 4.2 percent, and the self-employment tax rate from 12.4 to 10.4 percent. That payroll tax cut remained in effect during 2011 and 2012.
It replaced the Making Work Pay tax credit, which gave employees a 6.2 percent refundable tax credit on their earnings, up to $400 for single filers or $800 for married couples filing jointly.
The Great Inflation
In the 1970s, rising inflation and repeated energy crises increased the cost of oil and stalled U.S. growth. In response, the Carter white house enacted the New Jobs Tax Credit to encourage job growth. This short-term payroll tax holiday gave employers a tax credit worth 4 percent of their portion of Social Security taxes. That payroll tax credit eventually phased out in 1978.
Stay on Top of Repaying Temporary Payroll Tax Cuts
A payroll tax holiday might sound nice, but it’s important to remember that it simply postpones your tax obligations—it doesn’t eliminate them. It may benefit workers and companies in the short term but can add financial stress when the tax bill comes due.
The payroll tax holiday may have been created with good intentions but can create more problems than expected when put into practice.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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Hello Jane,
My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
Cheers,
John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Hi Jane,
Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
Again, thank you for your time today. I look forward to working with you in the future.
Cheers,
John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Hi Jane,
Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
Do you have any questions? We are here to help. Reach out whenever something comes to mind.
Thank you again for choosing ABC Agency to insure Jane's Bakery.
Cheers,
John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Dear Jane,
Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
Cheers,
John Doe
5. Introducing a New Product
A happy client may want to expand their business with you.
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Hello Jane,
I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
Would you like me to work up a quote for you?
As always, thanks so much for being a part of the ABC family.
Cheers,
John Doe
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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Hi Jane,
You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
Thanks so much for your help!
Cheers,
John Doe
7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
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Hi Jane,
I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
If you're still happy with the coverage, we can easily renew it for you.
Do you have some time to chat this week?
Looking forward to serving you again!
Cheers,
John Doe