Everything you need to know about Trump’s payroll tax deferral
Last month, President Donald Trump signed an executive memorandum directing the Treasury Secretary to allow workers to temporarily suspend paying Social Security tax starting in September until the end of the year.
The president’s goal was to put more money in workers’ pockets this year as many people deal with the economic fallout from the coronavirus pandemic. The guidance on how the deferral would work was released at the end of August, giving employers little time to implement the deferral.
Here’s what to know.
What are payroll taxes?
Payroll taxes include income taxes (federal, state, and local); unemployment taxes (federal and state); and Medicare and Social Security taxes. These are taken out of your paycheck automatically by your employer.
However, Trump’s payroll tax deferral only applies to the 6.2% in Social Security tax that is withheld from your paycheck. This tax funds the system that pays out benefits to Social Security recipients.
Who’s eligible to defer?
Workers who make less than $4,000 biweekly can defer the 6.2% tax they would normally pay into Social Security, starting Sept. 1 and ending Dec. 31 of this year. There is no phase-in for those making just over the maximum.
How do I opt in?
Check with your payroll department to see if you can opt in to the deferral if you want. Employers do not have to offer the deferral, according to the memorandum, so you may not have the option. Other employers may offer the option later in the year, because they haven’t had enough time to change their payroll processing systems to allow for a deferral. Before opting in, make sure you find out if you can opt out at any time before the end of the year in case your finances change.
Do you have to pay the deferral back?
Yes. But it’s your employer’s responsibility to make sure you do, according to new guidance from the Treasury Department and Internal Revenue Service (IRS). This doesn’t mean your employer will pay your share of the deferred taxes. What it means is that your employer is responsible for making sure to withhold those deferred taxes next year.
Here’s how that works.
If you decide to defer those taxes this year, you will see a bigger paycheck, because the 6.2% won’t be taken out for Social Security. But that still needs to be paid to Uncle Sam, because this is a deferral. So, your employer will take double that tax next year out of the paychecks you receive in the first four months of the year. That withholding will be used to pay back the deferred taxes. It also means your paychecks in January through April will be smaller than usual.
Only Congress can pass legislation to forgive the deferral, meaning you won’t have to pay it back. But that hasn’t been done — at least not yet.
Janna is an editor for Yahoo Money and Cashay, a new personal finance website. Follow her on Twitter @JannaHerron.
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