On August 28th, 2020, the IRS issued it’s guidance regarding the August 8th executive order regarding payroll tax deferral for the rest of 2020. This order directed the U.S. Treasury to allow employers to stop collecting Social Security payroll taxes through December 31, 2020 for workers making less than $4,000 bi-weekly/ $104,000 annually. Recall that you pay 6.2% and your employer pays 6.2% in Social Security taxes on every paycheck up to $137,000 annually (the 1.45% payroll tax that goes toward Medicare would not be deferred). Usually, your employer withholds your 6.2% on your behalf and sends it directly to the IRS. Here’s what you and your wallet need to know about the changes:
- This is a payroll tax deferral – not forgiveness. If your employer opts to follow the executive order, you will still owe those taxes come January 2021.
- For example: If you make $50,000 and are paid bi-weekly, this amounts to a $119.23 increase per paycheck through the end of the year.
- Those taxes will, however, need to be repaid from January to April of 2021. Any amount not repaid by the end of April 2021 will be subject to interest and penalties.
In short, as of this writing, this is a payroll tax loan. It will need to be repaid by April 2021. So, if you get a $119.23 increase in your bi-weekly paycheck in 2020; it will reverse in 2021, reducing your bi-weekly income by that same $119.23 plus the $119.23 for 2021 payroll taxes.
Additionally, it’s important to note that many employers do not have the payroll systems in place to implement the deferral.
What to do if your payroll taxes are deferred:
- Plan to repay the loan starting in January 2021
- Look for a high-interest savings account to store the funds
- Make sure to keep all paystubs from September 1-December 31, 2020
- If you leave your company prior to complete repayment of the deferred taxes, be prepared to have them withheld in a lump sum from your last paycheck.
Again, this is a loan that will require an act of Congress to be forgiven. If you do wind up with a deferral, save as much of those funds as possible to help keep you in the black come January 2021.