This month, you may have noticed your take-home pay get a little bigger. If you did, that's likely due to President Donald Trump's executive order allowing employers to defer the collection of payroll taxes between Sept. 1 and Dec. 31, 2020.
The payroll tax deferral is available to employees with income under $104,000 annually, but not all employers will take the opportunity to delay the collection of these taxes. If your employer does, you'll see the amount you get from your paycheck rise by about 6.2% until the end of the year, as this money would normally be taken out of your checks to fund Social Security.
While it may be nice to get this extra cash now, you could pay for it next year. In fact, you could see your take-home pay fall by 12.4% starting in January and going through April. Here's why.
Trump's executive order could lead to smaller take-home pay when the bill comes due
Getting an extra 6.2% in your pay now may seem like a good deal, but you will most likely still owe the payroll taxes, and you'll have to repay them between January and April of 2021.
That means that when the new year starts, your employer will begin to collect payroll taxes again and your check will go down by 6.2% as you once again begin paying the money you owe to Social Security. But that's not the only thing your employer will deduct: It will also begin withdrawing the 6.2% tax you missed from September to December.
This is just repaying what you would have already paid had the executive order not been issued. But it means that the amount you get from your paychecks for the first four months of next year could be a whopping 12.4% lower than what you were receiving during the last four months of this year.
This could be a huge problem if you didn't plan for that, especially if you're living paycheck to paycheck and you spend the extra money you get this year. Those who have just started working may also find this comes as an especially big shock if they didn't realize they were getting more money than they should have because payroll taxes weren't collected.
But there's a chance this may not happen. President Trump wants the deferred taxes forgiven and is urging Congress to do so, as well as suggesting the Treasury secretary should look for other legal means to avoid collecting these back taxes. The problem is, Congress hasn't shown much inclination to embrace this plan, and there's likely no legal way to forgive unpaid payroll taxes without legislative action.
That means you'll almost assuredly see a big cut to your income if your checks have gotten bigger during the end of this year. You don't want to be caught off-guard by this drop in take-home pay, so the best option you have is to see if your employer is deferring taxes. If so, save the extra 6.2% that would normally be collected to have more of a financial cushion when your income takes a hit next year.