Some workers may be getting what seems like a pleasant surprise in the near term. Thanks to President Trump's recently signed executive order, workers earning $104,000 a year or less, or $4,000 or less per bi-weekly pay period, will be entitled to a payroll tax deferral that boosts their paychecks starting in September through the end of the year. The tax in question that's being deferred is the 6.2% of wages employees typically have to pay toward Social Security, and not having to pay it will give workers more money to spend in the near term.
Why did the president choose to defer payroll taxes? Lawmakers have stalled on negotiations for a second coronavirus relief deal, and until one is reached, a second stimulus check can't go out. Those stimulus payments serve the very important purpose of giving people money to pump into the economy, and so in the absence of sending those out, the president is instead temporarily boosting paychecks with the goal of achieving the same purpose -- giving Americans more money to spend.
But what if your earnings exceed the $104,000 threshold for a payroll tax deferral? If that's the case, there's another option for boosting your paycheck -- adjusting your tax withholding.
A higher paycheck could be yours
There's a reason so many people wind up with a tax refund year after year. When you earn money through a job, your payroll department withholds a certain amount of tax based on the allowances you claim on your W-4. The more allowances you claim, the higher your paycheck.
Many people err on the side of claiming fewer allowances to help ensure that they don't owe money on their taxes. But in the process, they also lose out on the chance to collect more money as they earn it. Instead, they loan it to the government interest-free, and then collect a refund.
If you typically get a large tax refund, and your total earnings (meaning, your regular paycheck plus any side earnings or investment income) this year are comparable to what you've earned in the past, then all you really need to do to boost your paycheck for the rest of the year is adjust your withholding by claiming fewer allowances on your W-4. You can do regardless of how much you earn (though it may take your payroll department a pay cycle or two to implement changes based on your adjustments).
Now you may be worried that if your paychecks increase too substantially, you'll then have a tax liability on your hands come 2021. If that's the case, you can take the extra cash in your paychecks and stick it in the bank, and only dip in for emergencies. That way, if you do have an underpayment on your hands, you'll have a way to cover that tax bill next year as needed. But at the same time, you'll have access to more of your money up front -- and at a time when having extra cash on hand is so important.
Of course, one thing to keep in mind is that the people getting a higher paycheck right now through the president's payroll tax deferral will eventually end up having to pay those paused taxes back. Specifically, they'll start seeing lower paychecks beginning in January to compensate. On the other hand, if you're entitled to a larger paycheck via a withholding adjustment, you may not have to pay anything back at all. What you will get, however, is access to your money sooner rather than having to sit back and wait on a tax refund to be made whole.