About a month ago, I received a text message from a friend with what he thought was good news. President Trump signed an executive order that would provide a payroll tax holiday potentially putting 6.2% of his income back into his pocket.
After a little bit of research into the matter, I had to break the bad news. While the executive order would boost his pay for the remainder of the year, all of that tax would still be due in 2021.
The payroll tax & holiday
Payroll taxes are divided into three main categories: Federal income, Medicare, and Social Security. Trump’s order specifically targets the Social Security tax.
Typically, employees and employers each pay half of the total 12.4% Social Security tax. But under the executive order, employers wouldn’t withhold the 6.2% for Social Security from the employee’s pay. The employer would still contribute their portion.
The payroll tax “holiday,” or suspension period, runs from September 1 through December 31, 2020, and only applies only to those who earn less than $4,000 bi-weekly and less than $104,000 per year.
Some potentially good news is that your employer isn’t required to participate in the payroll tax holiday, which possibly makes the rest of what you are about to read a moot point.
That is unless you work for the Federal government. The U.S. government will implement an across-the-board payroll tax deferral for about 1.3 million federal employees starting in mid-September.
my employer participating, now what?
So what happens if your employer participates in the holiday?
You’ll see an increase in your paycheck over the next few months but come 2021 you are going to have start paying those taxes back and it will roughly double your Social Security tax rate from January 1 to April 30 when they are required to be paid back by.
If you leave employment or just don’t have enough wages to pay it back, the IRS will apply interest and penalties to the amount not paid back which will fall onto your employer to pay. They (the employer) may in turn try to find a way to make you (the employee) pay the interest and penalties. Talk about an uncomfortable situation to be in!
In order to avoid this, I’d suggest setting aside money now (if you can) and then start taking it out to replace the lost wages in January.
Note, there is always a chance that Congress will pass legislation to forgive the deferred taxes but I wouldn’t rely on that.