5 Questions About the Payroll Tax Holiday
- October 8, 2020
- By: Greenpath Financial Wellness
As the Pandemic continues, there has been a lot of news about economic stimulus programs issued by the U.S. government. The laws are meant to keep the economy as healthy as possible during this challenging time.
One stimulus program you might have heard about a month or so ago, called “The Payroll Tax Holiday,” puts a temporary pause on having employers pay certain payroll taxes until next year.
One of the points to know about the payroll tax holiday program is that it does not impact every employer or employee. In fact, many companies are opting not to participate.
Your employer can make the decision to participate or not, so employees can check with their employers to understand what it means to them.
If the program does apply to you, the deferral period runs from Sept. 1 through Dec. 31, 2020.
Typically, employees and employers each pay half of the total 12.4% Social Security tax due for each worker. That means the payroll tax deferral temporarily stops the 6.2% Social Security tax that employees cover.
Under this stimulus plan, employers may choose to pause withholding the 6.2% from employees for Social Security, but must still contribute their own portion for each worker.
The reasoning behind this plan is that when employees receive a temporary increase in their paychecks, it will help them spend on items they need, and keep the economy humming along when people might need the funds the most.
Questions to Keep in Mind
With so many questions about this stimulus program, assembled here are 5 key questions to keep in mind about the Payroll Tax Holiday, including how this stimulus program might impact your budgeting and financial health.
- Who is Eligible? According to the law, the payroll tax ”holiday,” or suspension period, runs from Sept. 1 through Dec. 31, 2020, and applies only to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 per year.
- Which Employers are Participating? Not every employer is deciding to participate. U.S. employers can opt out of the program for a variety of reasons. Contact your employer HR or payroll administrator to find out if your employer is participating, or has plans to participate.
- If Your Employer Participates, What’s the Impact on Your Paycheck? The payroll tax deferral temporarily suspends the 6.2% Social Security tax that employees cover, so you will see a temporary boost each payday. However, payroll taxes are not being “forgiven.” You’ll have to pay the taxes later. The IRS specifies that deferred payroll taxes must be repaid between Jan. 1, and April 30, 2021. Any tax that isn’t repaid within that window will be subject to interest and penalties. Employers could collect those penalties from their employees if necessary, according to the announcement.
- Do You Have a Plan to Payback the Deferred Taxes? Under a simple deferral, employees could face a large tax bill in 2021. Workers who get the 6.2% increase to their paycheck this fall will need to be mindful to have a plan to pay back the deferral. Even if those funds are useful during these financially challenging times, employees will be less stressed if they practice discipline in their budgeting to ensure they can meet the payments for the deferred taxes in 2021.
- Consider the Impact on Your Full Financial Picture. What does your entire household budget look like? Even with a temporary reprieve from payroll tax, consider monthly expenses for housing, food, medicines, transportation, credit card and other bills. Do you have extra cash each month to set aside for emergency funds? How can this temporary payroll tax reprieve benefit you in the short term? And again, what are the implications in the long term when the tax bill comes due? It will help reduce financial stress if you take the time to understand the impact on your full financial situation.
While it is nice to see an increase in wages now, like any holiday, the “good times” will eventually end.
To manage the stimulus program so it works for you, make a plan to manage the extra bit of cash you get this fall, take into consideration your full financial picture, and be ready to prepare for repayment of the deferred taxes when they come due.
Need Help Putting a Plan Together?
GreenPath’s professional, caring Financial Wellness Experts will assist you in assessing your financial situation and guide you to create a personalized plan to achieve your goals. We work with thousands of people each week to pay off debt, improve credit and lead a financially healthy life. Speak with a financial expert.