by Dana George | Sept. 11, 2020
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If your company is taking part in this short-term tax deferral, it will be up to you to repay what amounts to a loan.
On Saturday, Aug. 8, President Trump signed four executive orders. One of them allows employers to defer employees' Social Security payroll taxes through the end of the year. This so-called tax holiday applies to employees earning a biweekly pre-tax wage of $4,000 or less (approximately $104,000 a year). The problem is, this is not a tax break but money that must be repaid.
It is not clear if or when a second stimulus package will arrive, or what form it will take. But this tax deferral is very different from a stimulus check because you will likely have to pay it back.
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A 6.2% tax is normally withheld from an employee's paycheck to help fund Social Security -- a program millions of Americans depend on to pay their monthly bills. The employer pays an additional 6.2% into Social Security, for a total of 12.4%.
Under the executive order, which took effect on Sept. 1, employers can decide to let their workers off the hook for their 6.2% until Dec. 31. For example, someone earning $1,000 per week would receive an extra $62 per paycheck, for a total of $1,054 by the end of December.
While that may sound great leading up to the holidays, it is money that must be repaid by April 30, 2021. Employees may think they are receiving a 6.2% "bump" in income, but come January, they will have to start paying it back.
This tax deferral may hurt Americans at an individual level and as a society. Per the IRS, employers will be responsible for collecting tax-deferred funds from employees and repaying Social Security next year.
If employers recapture the money via payroll taxes, those employees will have to pay 12.4% per paycheck rather than the standard 6.2%. An employee earning $1,000 a week will have $124 taken from his or her paycheck rather than $62 for the first four months of the year. If an employee is barely making ends meet, that may put an even greater strain on their budget.
There are also risks for employers. For example, what happens if an employee quits before the end of the year? Is the employer expected to come up with the funds to repay the deferral? Or will they deduct it from the worker's final paycheck?
Finally, more than 64 million Americans count on the Social Security benefit check they receive each month. In April, the Social Security Board of Trustees released its annual report, which predicted a cash shortfall by 2035. Using Social Security funds today to make people feel like they're getting a tax break may further weaken the program. It could take years to realize the damage, but every little injury pulls at the fibers of an American safety net.
Consider this money as a loan, not a windfall and take these steps to protect your finances.
Regardless of how speedily the executive order was written, no one wants you to be hit with an unexpected tax bill in 2021. The adage "forewarned is forearmed" applies perfectly to this situation.
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