The Payroll Tax “Holiday” Comes Due Next Year

You’re may be getting bigger paychecks now that the President’s “payroll tax holiday” has started. If you are, you need to prepare yourself for a big drop in pay starting on January 1, 2021.

That’s because the payroll tax holiday is really just a delay. You still owe the taxes – you just don’t have to pay them right now. And to make up for the tax you’re skipping for the rest of 2020, your employer will take out double taxes for the first few months next year.

What Are Payroll Taxes?

When people talk about payroll taxes, they specifically mean Social Security and Medicare taxes – also called FICA. Social Security equals 12.4% of your gross pay, and Medicare equals 2.9%. That’s a total of 15.3%. So if your gross paycheck comes to $1,000, the total payroll taxes due would be $153. But that doesn’t all come from you.

Normally, you and your employer split this tax and each pay half – so 6.2% of Social Security and 1.45% of Medicare each. That means 7.65% comes straight out of your paycheck, and your employer matches the other 7.65%. So your part of the payroll tax bill on $1,000 of gross pay would be $76.50, and that would be deducted from your pay.

What’s the Payroll Tax Holiday?

Starting September 1, 2020, your portion of Social Security tax – that 6.2% – is on pause (as long as your paycheck is less than $4,000 bi-weekly). You still have to pay the Medicare portion, and your employer has to pay their full 7.65%.

On that $1,000 example paycheck, you’d be taking home an extra $62, and that would go through the end of 2020.

But starting in 2021, you have to pay it back. That means your employer will deduct extra Social Security taxes from your paycheck. So with that same $1,000 paycheck, starting in 2021 you’d have $138.50 taken out for payroll taxes: double Social Security of $124 plus regular Medicare of $14.50.

And if your job ends before January 1 (like it will for some seasonal or temporary workers), your employer will probably deduct a giant lump sum from your last paycheck.

The payroll tax holiday is optional for employers. If your employer does not participate, your paychecks won’t look any different.

Get Your Budget Ready

Having the extra cash right now will probably come in handy. You can use it to catch up on bills, pay down some debt, or build up your savings.

But make sure your budget takes the payback period into account. Be prepared to bring home less money with every paycheck from January through April 2021.

And if the rules change, and your employer doesn’t have to collect the shortfall, you may be facing a mega tax bill when your do your taxes next April.

Bottom line: The paycheck bump is not a gift… it’s a loan… and you will (almost certainly) have to pay it back. So be ready.

And if anything changes, we’ll talk about it here. So stay tuned.