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What the Payroll Tax Deferral Means for You


Oct. 27, 2020 Blogging For Change

While it sounds like a positive move to help workers and self-employed folks, you’ll want to get your head around the facts and know the pros and cons that come with such a deferral. Here’s a breakdown of what it means, how it might impact you, and how to prepare should you owe back taxes when April rolls around: 

WHAT IS THE PAYROLL TAX DEFERRAL?

In a nutshell, your payroll taxes for Social Security could be put on hold until the end of 2020. This executive order mainly impacts two groups: eligible workers and their employers. 

If you’re an employee, what this means is that the employer portion of Social Security taxes is pushed back until the end of the year. In return, you’ll receive a four-month pay hike of 6.2%, explains Josh Zimmelman, a managing partner at the NY-based Westwood Tax & Consulting. This deferral went into effect on August 28th, 2020, and is in effect until December 31, 2020. 

HOW THIS MIGHT IMPACT YOU 

In the immediate, the impact for employees is fairly straightforward: less comes out of your paycheck, so your take home pay through the end of the year is higher. 

On the employer’s end, it could be more complicated, says Zimmelman. For one, if you’re an employer, you’ll need to adjust your payroll systems to provide this deferral to your employees. 

Plus, the repayment process could be an issue. “For their workers to repay the deferred taxes, employers would need to increase their withholding on future paychecks,” says Zimmelman. But if you’re an employee and you end up leaving the company before your employer boosts their withholding on your upcoming paychecks, you might be on the hook for paying back the difference. 

NO, IT’S NOT A TAX BREAK 

As one might expect, there are a few misconceptions around the payroll tax deferral. The biggest one? It’s not a tax break or a tax cut. “It’s just a deferral, so the taxes will need to be repaid the following quarter,” says Zimmelman. 

“So while it may result in slightly larger paychecks until December 31, starting in 2021, those same workers will likely see even smaller paychecks.” 

That’s because your Social Security withholding will likely double in order for you to pay back those deferred payroll taxes. 

Another common misconception? Is that it’s for all workers. It’s only available for workers who will benefit from this deferral. As Zimmelman explains, workers in the U.S. earning less than $4,000 on a pre-tax biweekly basis are eligible. This adds up to $104,000 annually. Plus, employers aren’t mandated to participate. “Some may not prefer to, because of the administrative challenges of repayment,” he says. 

If your employer decided to opt in to the deferral, they likely would have informed you prior to August 28th start date.

HOW TO PREPARE FOR INCREASED PAYROLL TAXES 

And just like how the deferral is for four months, you’ll have four months in 2021 — between January 1 and April 30, 2021 — to pay back the 6.2% of each paycheck that would have gone to taxes. Again, you won’t just go back to your old pre-deferral paycheck — you’ll be paying double the rate in order to catch up.

If your employer has opted into this payroll tax deferral, here’s how you can best prepare to pay back those taxes once the new year rolls around: 

KNOW WHAT YOU OWE

Tax rules, thresholds, limits, credits, deductions, and other relevant items often change each year, points out Riley Adams, a CPA, and founder of Young and Invested. So even if your financial circumstances haven’t changed, your tax bill might experience a shift. 

“Staying on top of these developments will help avoid any surprise come tax return preparation time each year,” says Adams. “It’ll also allow you to make financial changes, where possible, to account for these changes and potentially use them to your benefit.” 

LOWER YOUR LIVING EXPENSES

While you might be squeezed financially right now, try to do your best to bump down your living expenses. And if you’ve tackled the big three categories — food, transportation, and housing — and don’t think you can cut back any more, try again. By implementing small changes, you might be able to scale back on your spending. 

After you’ve focused on the big stuff, go down your list of fixed expenses and see if there’s anything you’ve overlooked. For instance, app subscriptions that renew automatically every year, domain names you purchased during a burst of inspiration, only to have forgotten about them. It might not seem like much, but a $5 savings adds up to $60 a year.

Remember: if you’re opted in to the deferral, you’re currently taking home a bigger paycheck. Spend what you need to, especially if you’ve fallen behind on important bills, but don’t forget that the income boost is temporary. 

RAMP UP YOUR EARNINGS, IF POSSIBLE

Given the timing delay of these payroll taxes, any impact you will experience will be temporary, points out Riley. If your employer does offer payroll tax deferral, you might be better off keeping your tax situation as is and find ways to boost your income by, say, 5% to 10%. Finding ways to increase your take home pay might be a better, long-term solution. 

If you’re looking to earn more money within a short period, consider side hustles that don’t cost a lot upfront and have a low barrier to entry — walking dogs and shopping and delivering food on platforms such as Instacart. 

The truth is, while the payroll tax deferral is well-intentioned, there’s probably not a lot of employers who are offering it to their employees due to the administrative hassle. This tax deferral really won’t have much of an impact on most workers, explains Zimmelman. Very few employers are likely to opt into the program. And those who were hit the hardest by Covid-19 and are unemployed won’t benefit from this. 

“If you’re one of the few employees who are eligible, you can use this extra money to help shore up your savings or pay down debts incurred during the pandemic,” says Zimmelman. “Just don’t forget that you will need to pay that back eventually and will likely do that via smaller paychecks next year.”

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