Last month, Trump announced a new payroll tax deferral that puts a temporary pause on part of the taxes employees pay. The controversial order started on September 1 and says companies may stop collecting the 6.2% tax employees pay for Social Security. While many companies have already opted out, some employees don’t have the choice not to participate.
Federal employers—including the military—are among those who have adopted the temporary payroll tax change. The problem is, the deferred taxes can’t be forgiven without approval from Congress. This means companies will still be on the hook for the money, and they may have to withhold more taxes in early 2021 to make up the difference.
If you’re a federal or private employee dealing with the deferral—and have noticed a bump in your latest paycheck—you should start making a plan to pay more taxes in 2021.
To prepare, start by setting aside every penny of the extra income you have been receiving in your paycheck. By putting the money into a completely separate spot—like an online high-yield savings account, for example—you may be less likely to spend it.
Also, there are no guarantees the unpaid taxes will be forgiven. Democrats and Republicans are still negotiating the latest stimulus bill and some lawmakers don’t want to forgive the deferred payroll taxes, which could make it an uphill battle in Congress.
A safer bet is to plan on getting lower paychecks for the first four months of 2021. While it may be painful for employees, it could be the easiest way for companies to recoup the unpaid payroll taxes before the April 2021 deadline.
It may be tough to know what your budget will look like in the spring—particularly with the coronavirus pandemic still happening—but if you’re able to save the extra tax money now, the smaller paychecks may be easier for your family to manage.