Does your paycheck look a little higher than normal? If so, it could be a tax trap.
A payroll tax holiday effective September 1 was recently signed via a presidential executive order. Payroll tax holidays typically provide forgiveness of Social Security and Medicare taxes that are normally withheld from your paycheck.
This year’s tax holiday, however, is NOT necessarily a forgiveness of Social Security and Medicare taxes because the order is not yet supported by an underlying legislative action. So even if your employer removes your Social Security and Medicare tax from recent paychecks, there is a possibility you will need to pay it back at a later date. That could mean a pretty large tax bill for you in early 2021!
What you need to do
• Compare paychecks. Get your last paycheck from August and your first paycheck from September. Compare the amount of Social Security and Medicare taxes withheld from your August paycheck to your September paycheck. If the amounts are the same, then your Social Security and Medicare taxes are still being withheld.
If you notice that the amounts are different, or that no Social Security or Medicare 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.
• Be prepared to pay it back. If no Social Security or Medicare taxes have been withheld from your paycheck through the end of 2020, be prepared to write Uncle Sam a check to pay these taxes in early 2021. If possible, open a savings account to set aside the Social Security and Medicare taxes that were not withheld from your paychecks. When it comes time to pay your taxes, the money will be ready to go.
• Check back here for updates. There’s a chance Congress passes a law that forgives the Social Security and Medicare taxes not withheld from your paychecks. If this happens, you will have a nice start on an emergency savings fund should you need it.
If you have any questions about how this payroll tax executive order affects you, please call.