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 holiday was enacted for September 1, 2020 through December 31, 2020, via a presidential executive order. Employers are permitted to suspend withholding of Social Security taxes from your paycheck as long as you earn less than $4,000 during a biweekly period. Employers may voluntarily participate, but it is not mandatory. It is important to realize that this is only a deferral of the tax, not forgiveness of the tax. Without legislative action by Congress, the Social Security taxes will need to be repaid in 2021. This means you could have double the usual amount of Social Security tax withheld during the first quarter of next year until the entire deferral has been repaid.

What You Need To Do

Compare paychecks. Get your last paycheck from August and your first paycheck from September and compare the amount of Social Security taxes withheld. If there is a difference, or you notice that no Social Security taxes were withheld from your September paycheck, then you may have a tax repayment bill in early 2021.

Keep checking. 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 if the tax obligation will be forgiven.

Be prepared to pay it back. If possible, open a savings account to set aside the Social Security taxes that were not withheld from your paychecks. The money will be available to use while your take-home pay is reduced in early 2021.

There’s always a chance that Congress could pass a law forgiving the deferred taxes, and repayment will not be necessary. If you have any questions about how this payroll tax executive order affects you, please call us.