We know that 2020 has been a tough year. For many, it’s also been a financially challenging one. That’s why we want to keep our members up to speed about government efforts to provide financial relief for those affected by COVID-19 and its impact on the economy.
One recent effort, which was put into effect on September 1 following a presidential memorandum, is a payroll tax deferral through the end of 2020. While it may not provide the same relief as the $1,200+ economic impact payments sent out earlier in the year, this measure could be a help for some.
But it’s important to understand that the payroll tax deferral is not free money, and it’s not available to every worker. Here are some answers to common questions about the new payroll tax deferral.
What Is the Payroll Tax Deferral?
This order gives employers the option to defer withholding and payment of one type of employee payroll tax—Social Security tax—from September 1 until the end of the year. Based on the most recent IRS guidance, the deferred tax repayment period is January 1 through April 30, 2021. That’s right, the deferred taxes will need to be paid back within the first four months of 2021, meaning your checks during that time could be smaller to make up for the taxes that weren’t taken out September 1 – December 31, 2020.
Because 6.2% of a worker’s pretax income goes to Social Security, the ability to delay payment of this tax could add hundreds of dollars to workers’ take-home pay by the end of this year.
Does This Affect Me?
Maybe, maybe not. For one thing, only workers whose taxable income, calculated on a biweekly basis, is less than $4,000 during the eligible period can defer their Social Security tax payments. Also, importantly, the decision to defer payroll taxes rests with the employer, who is ultimately responsible for remitting the tax during the repayment period.
Are All Employers Deferring Payroll Taxes?
Many are not. One reason for this is that there are unanswered questions about the payroll tax deferral. For example, it’s unclear how the deferred taxes would be repaid if the employee leaves. Check with your employer or HR department to find out how your company is handling this.
Businesses have also expressed concern about creating a new financial burden for workers by withholding extra Social Security taxes starting in 2021 (to recover the deferred amount). The IRS has stated that Social Security taxes from the eligible period that haven’t been repaid by May 1, 2021, will be subject to interest, penalties, and additions.
If your employer has chosen to defer employees’ payroll taxes, hopefully they’ve let you know. If you’re not sure, ask them about it, or check your most recent pay stub to see if Social Security taxes are being withheld as usual.
How Will This Affect My Finances Next Year?
According to government guidance, employers are required to collect the unpaid Social Security taxes between January 1 and April 30, 2021. This will temporarily increase tax withholding and ultimately lower your take-home pay by the same amount that it went up during the payroll tax deferral.
If My Taxes Are Deferred, What Should I Do With the Extra Money?
Use it wisely. After all, this is money you’ll pay back later, so you don’t want to splurge. The best use for extra money depends on your current financial needs. We recommend using it for essentials or adding the money to your emergency savings fund. Make sure you have a dependable savings account or money market account to keep your funds safe and easily accessible.
Along with staying on top of your financial responsibilities now, it will be important to prepare for potentially lighter paychecks in coming months.
If you need more information about the payroll tax deferral, check the IRS website for updates or talk to your employer. Also, keep in mind that information and guidance about the payroll tax deferral is subject to change.
This information is provided for educational purposes only and is not financial advice. BluPeak Credit Union does not guarantee its accuracy. Details of the payroll tax deferral are subject to change based on new government guidance. For tax-related questions, consult a tax professional.