STWS Advisor Jennifer Meyer provides an update for feds on the payroll tax deferral and the second stimulus check
Many Federal employees have had a 6.2% increase in their paychecks since the end of Summer. This was a result of the Executive Order issued by President Trump in August 2020 deferring payroll taxes until the end of 2020. While the extra income is always welcome, the bad news is that beginning in January 2021- those taxes will need to be repaid by employees. As a result, without further action, employees can expect a net reduction in their take home pay. This payback period was originally scheduled to last until the end of April 2021. However, the recently passed stimulus bill offers an extension to the pay-back period through the end of 2021. Details are still forthcoming pending President Trump’s signature officially placing the bill into law.
Generally, employees pay 6.2% of each paycheck to what are known as the “payroll taxes.” These taxes help to fund Social Security and Medicare programs. Beginning in January 2021, employees will resume paying the 6.2% which was deferred, PLUS will owe an additional 6.2% as part of the payback of the deferred taxes. This means rather than the usual 6.2% withholding, employees will now have 12.4% withheld each pay period for said payroll taxes. Ouch!
When the Executive Order took effect, there was a push by Congress to allow employees to “opt-out” of the deferral. Unfortunately, the move never took hold and employees were not given an option to participate or not.
There was a lot of attention given to increase awareness for employees in hopes they would save the deferred taxes so that the upcoming pay-back period would not create financial hardship. Hopefully, employees were paying attention and did so. If not, now is a good time to be thinking about how to manage the upcoming decrease in net take-home pay.
The just-passed stimulus bill will offer a $600 direct payment to Americans making under $75,000 annually. Saving that $600 to help offset the net take-home pay reduction would be a wise decision for many employees.
One of the most often given gifts over the holidays is cold hard cash. Employees could use such gifts from family and friends to offset the upcoming pay reduction.
As with many government initiatives, the payroll tax deferral was created with good intentions. However, the impact of not giving employees the opportunity to opt-out may create more problems than expected when the Order was issued. We will update our federal employees when there is additional clarity regarding the possible extension through 2021 resulting from the current stimulus bill. At Serving Those Who Serve we are here to help. Please reach out if you have any questions!
**Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.**
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