What You Need To Do With 2020’s Payroll Tax Deferral

As of September 1st, President Trump has announced a new payroll tax deferral that puts a temporary suspension on the 6.2% tax employees pay toward Social Security. Federal employees aren’t able to opt out of this deferral and will notice their paychecks increased a little for the remainder of 2020. This sounds like a great plan right?

Not so fast. While your paychecks may show more money in the coming months, this only a deferral of the tax, not a forgiveness of the tax. Every affected employee will see a “drop” in pay starting January and ending April 2021.

If you’re an employee affected by the payroll tax deferral, here are ## tips to be more proactive with your remaining paychecks in 2020.

First, let me explain what this payroll tax deferral of 2020 is.

President Trump issued a memorandum on Aug. 8, 2020 offering payroll tax deferral for the remainder of the year. At first, it was unclear whether this deferral was voluntary or optional.

As of Sept. 1, an executive order was issued to state that the tax deferral is not mandatory but rather it is voluntary and there would be no penalty for not volunteering. In other words, employers were given the choice whether to participate or not.

One of the largest employers who’ve opted to participate is the federal government – including enlisted military service members and civilians.

Employees who have wages and compensation of less than $4,000 per given bi-weekly payroll will see a 6.2% increase in pay between September through December.

In case you were wondering, workers and employers each share half of 12.4% tax to cover OASDI (Old Age, Survivors, and Disability) of FICA taxes. The employee’s half is the deferred amount being discussed here.

Come next year, participating employers will need to withhold and pay those deferred taxes proportionally. Specifically, there will be a 12.4% deduction in pay to make up for the taxes deferred.

While this isn’t a tax forgiveness, President Trump has announced that he plans to terminate the payroll tax if he is re-elected. This isn’t a guarantee that it will be forgiven but that doesn’t mean we aren’t able to be prepared for what may come.

Save it for rainy season

Notice how I didn’t say rainy day? That’s assuming that you’ve already got a family budget you’re following to save you for a rainy day or when an emergency hits. If you don’t have a budget, that’ll be explained more in the tip below.

“When life gives you lemons, save it for the right season”

– Mr Simple FI

When I say rainy season, I’m referring to the Jan. to Apr. 2021 timeframe. There is no guarantee President Trump will be re-elected or if he will hold true to his word. So let’s assume that isn’t the case moving forward.

It’s inevitable that your paychecks will decrease during that period to make up for the deferred taxes not taken out this year. But all hope is not lost.

Instead of spending this new found money, stash it away to ease the paycheck decrease later. There is nothing forcing you to spend this money today. You can do with it as you please.

If you really need the money, then use it rationally – applying it to the most logical situation. For example, paying off consumer debt, increasing the emergency fund, or building up a down payment for a house. The extra money can be spent intelligently but spend it within reason.

Another great alternative is opening up a high-yield savings account and saving it there.

Related: 15 Financial Rules You Probably Never Heard Of (And Some You Have)

Use a high-yield savings account

You may as well make some interest back on your money for the time being. If you don’t have a savings account, it really isn’t difficult to enroll online.

Conveniently from home, you can sign up with several companies that offer this option. You’ll need to do some homework to find the one that works best for you.

Here a few options below.

Granted, the interest earned from these accounts aren’t mind-blowing but they’re way better than the sub-quarter percent savings accounts you’re used to. You could be earning 5 to 10 times more with the accounts listed above.

“Don’t work for money; make it work for you”

– Robert Kiyosaki

At least you’ll make a little bit of money in the end. It isn’t going to be much but it’s better than nothing at all.

Start following a budget

You might be following one right now. If so, then this step isn’t for you. You’re ready to take on this tax deferral because you’ve proactively taken control of your finances.

For those who don’t have a budget, now is the perfect time to start. With the “additional” money soon to be showing up, this a better reason to ensure your finances are in order.

The best advice to come out ahead in finances is to save more and spend less than you earn. That is only achievable when you know how much you make and where your money is going.

But there are other reasons for following a budget that include:

• Managing your money better
• Gain control of every dollar
• Understand your savings rate
• Learning your spending habits
• Able to handle an emergency

A budget will keep you aligned to your financial goals regardless of “extra” money showing up in your paycheck. Besides, this money will need to be paid back later so technically it isn’t free at all. Take a proactive approach with your money and being budgeting today.

Related: 7 Reasons Why Budgeting Is Important

Are You Making These Common Budget Mistakes?

How To Budget With A Pen And Paper

Conclusion

For some of us, the payroll tax deferral is unavoidable leaving us no option to opt out of it. But that doesn’t mean we shouldn’t be proactive and be smart with our money. Use these tips for that extra 6.2% you’ll be seeing in your paychecks for the rest of 2020.

Do you agree with the payroll tax deferral? Would you opted out? Why or why not?