Is a Tax Trap Lurking in Your Paycheck?

Does your paycheck look a little higher than normal? If so, it could be a tax trap.

The Problem

A payroll tax deferral beginning September 1 was recently signed via a presidential executive order. This deferral of the employee’s portion of Social Security will raise your paycheck temporarily until January, 2021. Beginning in 2021, the deferred Social Security will then need to be paid.

This year’s tax deferral is NOT currently a tax holiday. So even if your employer removes your Social Security tax from your paycheck, there is a real possibility you will need to pay it back between January and April, 2021. That could mean a pretty large tax bill for you in early 2021!

What you need to do

  • Compare paychecks. If you are unsure whether your employer is participating in the tax deferral, get your last paycheck from August and your first paycheck from September. Compare the amount of Social Security and other taxes withheld from your August paycheck to your September paycheck. If the amounts are the same, then your Social Security and other taxes are still being withheld.

    If you notice that the amounts are different, or that no Social Security taxes are withheld from your September paycheck, then that’s a signal you may have a tax repayment bill in early 2021.

  • Remember to keep checking each paycheck. Companies are struggling to figure out if they are required to comply with the presidential executive order, payroll providers are trying to figure out how to comply, and everyone is wondering whether the tax obligation will be permanently forgiven. So you will need to keep checking your paycheck throughout the balance of 2020.
  • Be prepared to pay it back. If taxes have been deferred from your paycheck through the end of 2020, be prepared to have your paycheck withholdings increase substantially beginning in 2021. If possible, open a savings account to set aside the taxes that were not withheld from your paychecks. When it comes time to pay your taxes, you will have funds to weather the repayment storm.
  • Check back here for updates. There’s a chance Congress passes a law that forgives the deferred taxes. If this happens, you will have a nice start on an emergency fund should you need it.
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