Please ensure Javascript is enabled for purposes of website accessibility

Trump's Coronavirus Stimulus Plan Could Shrink Your Paychecks in 2021

By Christy Bieber – Updated Sep 13, 2020 at 2:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You may get more money now, but the bill will be due sooner than you think.

Americans have been waiting months for Congress to approve a second coronavirus stimulus check, but the chances of that happening are slim as Republicans recently proposed a "skinny" relief bill without another check (a proposal that was blocked in the Senate). President Trump took action on his own recently amid the stalled negotiations by signing an executive order allowing employers to defer the collection of payroll taxes between Sept. 1 and Dec. 31, 2020, for employees earning under $104,000 annually.

Employees normally pay a 6.2% payroll tax on earnings up to $137,700 in 2020 to fund Social Security. Thanks to the president's executive order, those whose employers decline to collect the tax over the next few months will see their paychecks get a little bigger. But a payroll tax deferral is not the same as a payroll tax cut. And while Trump has pledged that the unpaid taxes could ultimately be forgiven if he's reelected, it's not clear if Congress would agree (especially since Democrats are likely to retain control of the House of Representatives) or if he could find other authority to make that happen. 

Since there's a good chance payroll tax forgiveness won't happen, it's important to realize the bill could come due (and sooner than you think) for the president's stimulus plan. 

Couple looking at financial documents in dismay.

Image source: Getty Images.

Your paychecks could be smaller next year due to Trump's coronavirus relief 

Workers who see larger paychecks this year because their employers stop withholding payroll taxes will be in for a nasty surprise come Jan. 1.

That's because any employers who don't withhold payroll taxes over the next few months could be required to collect the unpaid tax amount between Jan. 1 and April 30, 2021. And if any taxes remain unpaid after the April 30 deadline, interest and penalties will begin to accrue immediately on May 1, 2021.

This could be a major financial shock to workers because two things will happen starting January:

  • Trump's payroll tax deferral will end, and your employer will once again start collecting the 6.2% you'd ordinarily owe for Social Security
  • Your employer will probably have to start collecting the extra 6.2% that you didn't pay between Sept. 1 and Dec. 31 this year.

So you're looking at paychecks that shrink by a combined 12.4% beginning the first of the year, compared with the last paycheck you received in December. And although you're just paying taxes that are due anyway, this still may feel like a sharp drop in household income if you've gotten used to fatter paychecks over the four prior months. Suddenly seeing smaller checks never feels good, especially during a recession when every dollar counts. 

Of course, Trump's executive order doesn't require employers to defer the collection of payroll taxes, so there's a chance your company will simply opt out. If that happens, you won't benefit from the coronavirus stimulus now since your checks won't be any larger -- but you won't have to pay the piper later and face double payroll deductions. 

If your employer hasn't stopped withholding payroll taxes, there's nothing you need to do. But if you find your paychecks are higher now because your employer isn't collecting the 6.2%, the smartest thing you can do is to put the extra money in the bank. You'll need it next year when your checks shrink, unless Trump is reelected and finds a way to persuade Congress to forgive the taxes that are due. 

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.