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Last month, Trump introduced a new payroll tax deferral that pauses part of the taxes employees are required to pay. The controversial order, which began on September 1, allows companies to suspend the 6.2% tax employees contribute to Social Security. Although many businesses have chosen not to participate, some workers have no option but to take part.
Federal employees, including those in the military, are among those who have implemented the temporary payroll tax change. The challenge is that the deferred taxes can't be erased without Congress's approval. This means businesses will still be responsible for the funds and may have to collect additional taxes in early 2021 to cover the difference.
If you're a federal or private sector employee affected by the deferral and have noticed an increase in your paycheck, it's time to start planning for a higher tax bill in 2021. To prepare, consider saving all the extra income you've received. Keeping it in a separate account, such as an online high-yield savings account, can help prevent you from spending it too soon.
Additionally, there's no assurance that the deferred taxes will be forgiven. Both Democrats and Republicans are still working on the latest stimulus bill, and some lawmakers are opposed to forgiving the deferred payroll taxes, which could create challenges in Congress.
A more cautious approach is to expect lower paychecks for the first four months of 2021. While this may be difficult for workers, it could be the simplest way for businesses to recover the unpaid payroll taxes before the April 2021 deadline.
It might be hard to predict what your finances will look like come spring—especially with the ongoing coronavirus pandemic—but if you're able to set aside the extra tax savings now, the smaller paychecks may be easier for your family to adjust to.
