Hello September! It seems to me that 2020 is ticking down the way a football game does. You know what I’m talking about, where one team is so far ahead that no one even tries a Hail Mary pass to a long-shot teammate scrambling towards the endzone. Instead, the game is so far out of reach, the winning team has piled onto the field with ten or fifteen seconds still on the clock. You can see the winners jumping up and down, slapping each other on the back and dumping a full water cooler over their coach’s head. That’s what this year feels like to me and the winning team is clearly the coronavirus with the rest of us slinking out of the stadium in our pajamas, shaking our heads in disbelief.
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But wait, there’s more! While we wait out the remaining seconds in the third quarter of this year, we are faced with another financial issue, the consequences of which could be quite severe. I’m talking about the payroll tax holiday that starts today, September 1, 2020. Let’s take a minute to talk about what that means from a practical perspective.
Anyone who has a job where they earn a regular paycheck, knows that certain things are withheld from your earnings. These withholdings include, at the very minimum, an amount that goes toward your income tax liability and an amount that goes into the Social Security and Medicare funds. From a percentage perspective, 6.2% is withheld from your check to pay Social Security and 1.45% to pay for Medicare. Your employer adds another 7.65% onto it and the whole chunk of change gets sent off to the federal government who then pays it out to current recipients of Social Security and funds the Medicare program, respectively.
Now, there are two things you need to know about this holiday, in my opinion. First, this holiday is only a DEFERRAL right now. The withheld funds have NOT been forgiven. Only Congress has the power to forgive those funds and honestly, I don’t see that happening because the future of the Social Security trust fund depends on being replenished with funds paid into it today. More on that in a minute but first, let’s talk about the immediate impact this holiday will have on you in the next six months.
First things first, if you elect to stop having this money withheld from your paycheck, you will see a slight increase in your take home pay. And while I am a fan of putting more money in the average wage-earner’s pocket, I can’t help but think this could wind up hurting you more than it helps. As things stand right now, you will have between 1/1/21 and 4/30/21 to pay that money back. This means you will likely be paying DOUBLE the amount you would ordinarily have withheld from your paycheck. So, instead of paying 6.2% for Social Security every pay period, you’ll be paying 12.4%. If you don’t have double the amount withheld from your check, it could reduce your refund come tax time. Doesn’t sound too fun to me, how about you?
Second, I mentioned that I doubt the withheld funds will be forgiven. You may be asking yourself why that is the case, well, I’ll tell you. Right now, there are about enough funds in the Social Security trust fund to pay out benefits until anywhere from 2035 to 2032 (according to the SSA.gov website and other studies I’ve read). However, if those funds are not replenished and re-invested (remember, we need to harness the power of time and compounding), I’ve seen estimates that the fund might only last until 2023. That is scary, if you rely on Social Security as your source of income like many Americans do. So, do I think those deferred funds will be forgiven. Nope, not a chance.
Third, it looks like it will be up to employers as to whether they will be allowing their employees to defer these payroll tax withholdings. I’m seeing that most employers are opting out of the payroll tax holiday, meaning they are continuing to withhold these taxes from their employee’s checks. I think that’s a good idea and I would strongly encourage you to check your paystub to make sure they are being withheld. Ultimately, it will be the employee’s responsibility to make up the deferred payments so you better be sure you are on top of this situation as soon as possible so you don’t end up having to pay more at tax time than you can afford.
Fourth and finally, if you are employed by the federal government, you are out of luck. The federal government is the only major employer to opt-in to the payroll tax holiday, so far. This means that if you are a federal employee, you would be wise to figure out how much is typically withheld from your paycheck for this tax and start stashing it away for 2021. It looks like you’ll have extra taxes to pay sooner than you think.
This is why I preach financial empowerment, so we don’t find ourselves in situations like this. The last thing I want is for the federal government to be making my financial decisions for me and my family. While I know times are tough for millions of Americans right now, I know we can get through this, like we have many times before. Once we are back on our feet, though, it’s time to start making changes to how we think about money. Until then, keep your chin up. Brighter days are coming!
Now is the time for us to gather ourselves and start making changes to our finances. Do not wait to be vigilant. If you want to hear more about how the Social Security program could be impacted by this payroll tax suspension, check out this NCVTV episode or you can listen to it as a podcast episode. Get started taking control of your finances today!
Sincerely,
The Dollar Lama
P.S. Make sure you check out my online courses, books and resources, too! Investing in your money management education is an investment in yourself. That’s the best investment you’ll ever make, I guarantee it!. Don’t forget my weekly Facebook live videos on Facebook.com/newcashview, Instagram @joyalfordbrand and on my YouTube channel NCVTV. You can catch me Thursday evenings between 7:00 and 9:00 (Eastern Standard time), for my weekly NCVTV episode. They are packed full of useful and entertaining money management information! If you’ve missed any NCVTV episodes, you can see the latest on newcashview.com