What is the Payroll Tax? What is the Deferment? Why did they implement the deferment? What should I do to prepare for the higher taxes in 2021?
This is not a payroll tax cut but part of the Cares Act of March 2020 that gave most Americans the first stimulus check.
Amy is a Military Spouse and Financial Coach. She desires to educate everyone she can on the importance of taking control of their financial circumstances. She brings you budgeting help for your personal finances.
This articles main point is the individual tax payer information on the subject. If you are an employer please look to the IRS Information on the subject.
Check out Payroll Tax Deferment Savings Checklist 2020 to get your Free Blank Checklist
What is the Payroll Tax?
Bottom line, it is your contribution to Social Security. Your employer and you share the payments for the Payroll Tax. For the employer there are a lot more standards on when they pay their portion. For you the individual, you simply see your portion (6.2%) come out of your pay check.
What is the Deferment?
The deferment was part of the Coronavirus, Aid, Relief and Economic Security Act (CARES Act). It is optional for the employer to partake in. All employers may defer their deposits and payments.
Under the President's Executive Order federal employers (Payroll Providers) are starting to implement the deferment option from the Cares Act on the second paycheck of September 2020. Instructions for the implementation can be found at Relief with Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic for employers.
Why did they implement the deferment?
The deferment option from the Cares Act was implemented to help the individuals in current situations where they are in extreme need of the extra funds for their personal finances, health and safety. It is meant to help individuals while the second stimulus check still under negotiations in congress.
What should I do to prepare for the higher taxes in 2021?
With repayment options still unclear there are a few things to think about. Some think that there will be a bill introduced that will waive the tax to be repaid. However, I can not allow you to rely on that happening. You need to make sure you are setting yourself up for success and not allowing this, in a sense 0% loan, to become a hardship for you in 2021.
Also, pay raises for all federal employees, including military, is still proposed and not official. Since there is not security in a pay raise for 2021 I cannot allow you to think that you will be able to use your pay raise to help fund your repayment of the tax in 2021.
Check out Payroll Tax Deferment Savings Checklist 2020 to get your Free Blank Checklist
For those that are not in need of the extra assistance:
Take the extra amount you are now receiving from not paying the tax and put it into a savings account. Make an automatic transfer happen the day of or the day after you are paid. This way if you don't see it you aren't as likely to use it. You can either put it into your current savings account if you feel self disciplined enough to not touch it. If you do not have the self discipline I recommend setting up a separate account.
For those that need the extra assistance:
I want you to make sure you are prepared in your budget for repayment in 2021. With no security in receiving a pay raise or the tax to be waived for repayment you really need to analyze your needs vs. wants. I am more than sure if you are at this point you have already been doing your best and I am so proud of you for that. Please do not allow this temporary assistance ruin your finances for 2021. Analyze and reanalyze every transaction you are making.
If you are able to find some savings each month in the next few months put that away into a separate account to help you repay the taxes for September through December 2020. It may not be enough to cover all the taxes but it will help you get through the next 8 months and help you stay on track.
Can I help you further?
If you would like to see if I can help you plan for your future through this uncertain time schedule a Free 30 Minute Consult. We can review your needs and wants and see if further coaching is a fit for you.
Check out Payroll Tax Deferment Savings Checklist 2020 to get your Free Blank Checklist
Further Information and IRS FAQ's-
For information directly from the IRS - Deferral of employment tax deposits and payments through December 31, 2020