In early August, the White House released a memorandum as part of COVID-19 disaster relief efforts. This memo, officially titled “Deferral under Notice 2020-65” stated that employers could defer Social Security tax payments for their employees. Let’s break down what the memo could mean for you:
What is the Payroll Tax Deferral?
Relief programs released by the government can sometimes be intimidating. Their use of formal language and official terms can make them difficult to understand. But the payroll tax deferral program is fairly straightforward when you get down to the foundation of it.
In essence, employers can choose to enroll in the program, which translates to a delay in your Social Security tax being withheld from your paycheck from September 1, 2020 to December 1, 2020. Unlike other taxes, your income doesn’t change how much Social Security tax is taken out from your paycheck. Both your employer and you pay 6.2% of your income in Social Security taxes.
For most companies, this program is completely voluntary, which means you might or might not have noticed a change in your paycheck amount recently. However, the program is not voluntary for federal employees, including active military.
The only other exception to this program is for anyone whose paychecks equal more than $3,999 bi-weekly. Anyone in that income bracket or above will not have their Social Security tax withheld, even if their employer volunteers for the program or they are a federal employee.
How Can the Payroll Tax Deferral Affect You Now?
If your employer has chosen to participate or you are a federal employee or active duty military, then you will notice your paychecks will be a little higher until December 1st. If you’re not sure if your employer is participating, we recommend reaching out to your company’s Human Resources or Payroll department. You can also take a look at your paystubs and note if any amount of Social Security tax was deducted from your paychecks after September 1st.
Let’s take a look at an example to help you see how much additional money this translates to. If your bi-weekly paycheck is $2800 before taxes, starting on September 1st, you would notice an additional $173.60 each pay period (6.2% of your salary). In total, from September 1st to December 1st, you would see an additional $1983.52.
How Could the Payroll Tax Deferral Affect You in the Future?
Keep in mind that this is a deferral in Social Security tax, which means you will owe the taxes you did not pay during the deferral period. In the example above, the $1983.52 in Social Security tax not taken out of your paychecks from September 1st to December 1st would need to be paid in 2021.
Currently, there is no specific plan as to how these collections will be made or what additional forms might need to be included on your 2020 taxes. However, more than likely, your employer will need to make arrangements to collect these payments from January 1st to April 20th. Late payments could potentially incur a penalty of 10-15%.
To lessen the impact of these payments in the future, consider reserving the amount you’ll owe in a savings account. Simply take your bi-weekly, pre-tax salary and multiply it by 6.2%. Then take that amount out of each paycheck from 09/01/20 – 12/01/20 and put it in a savings account.
Should you need financial assistance during the current crisis, there are several steps you can take to create a budget and boost your financial health. Monitoring your income and reducing your spending can be helpful in staying financially fit.