Written by guest blogger Melissa Koehler, CPA.
Changes to your Paycheck are coming: Save now, Pay Later
On August 8th, President Trump signed an Executive Order, Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. The intention behind the executive order deferring payroll tax is to provide additional relief for employees working through the coronavirus pandemic. However, unless congress steps in and issues more guidance, what most people are going to find out is that although your paycheck will be higher now, it will be less later. It is not a tax cut – it is a tax deferral. You can think of this “deferral” as simply an interest free loan. Below are questions and answers most are asking about how the president’s executive will affect them.
When is the effective date?
The deferral period began September 1, 2020 and will run through December 31, 2020.
Who is covered?
According to the presidential memorandum, the deferral shall be made available to any employee whose wages are less than $4,000 on a bi-weekly pay period. In other words, on a weekly basis, if your pay is less than $2,000 you more than likely qualify for a deferral.
Which payroll taxes are deferred and how much do you get?
If you look at your most recent paycheck, you will see under the withholding section a line item “FICA-SS” or similar description. It may say “Social Security”. The deferral only applies to the Social Security tax of an employee’s paycheck. The employee portion of Social Security tax is 6.2%. For example, if your gross paycheck (that is before taxes and deductions) is $2,000, the Social Security tax of $124 will typically be withhold weekly. During the deferral period, you will have $124 per week extra in your pocket during 9/1/20 – 12/31/20.
When are deferred taxes due?
At this time (subject to change as the date of this blog), the deferred Social Security tax payment is postponed until the period of January 1, 2021 to April 30, 2021. Starting January 1, 2021, you will see double the Social Security tax being withheld from your paycheck. Instead of seeing the normal 6.2%, or a zero amount during the deferral period (9/1/20 – 12/31/20), starting 1/1/2021 – 4/30/2021, you will see 12.4% being withheld for the Social Security Tax. So, a person making $2,000 per week, will now see $248 of social security tax being withheld from their paycheck.
Why do I see that my paycheck now is deferring the Social Security tax, but my spouse’s paycheck who works for a different company is not deferring their Social Security tax?
Businesses can pass on deferring the employee portion of Social Security tax. The employee Social Security tax deferral is not mandatory for employers. While you may see your employer is deferring, your spouse’s employer may not.
Can employees opt out of the deferral?
The president’s memorandum does not explicitly answer this question. Without further guidance, this may depend on what your employer will let you do. Most employers are making it all or nothing due to the administrative burden to have some employees opt out and some not.
What should you do know in anticipation of double withholdings?
First, find out from either your paycheck or your employer whether you are participating in the payroll tax deferral. If you are, until there is final word that they make this deferral forgivable, it is recommended that anyone whose income is affected by this Payroll Deferral save money NOW, so they have cushion when more taxes are taken out of their paychecks in 2021. For each paycheck you receive, save back 6.2% of your gross pay (pay before taxes & deductions) and put it into a savings account. This way you will have the cash when your paychecks are lower in 2021. If they decide to forgive it between now and before you must pay it back, congratulations, you now have extra cash to spend!
*Note: We are not tax professionals. Please consult a tax professional for more information.