Four months ago, President Trump signed an executive memorandum allowing employers to temporarily suspend the 6.2% federal payroll tax withholdings that go toward Social Security. The so-called "tax holiday" made paychecks bigger for eligible workers while the program was in effect, from Sept. 1 through Dec. 31. But now that the expiration date for this program is fast approaching, employees who benefitted may be in for a shock — because all of those deferred tax withholdings will have to be paid off.
The idea of temporarily lowering payroll taxes was supposed to put more money in workers' hands and help stimulate the economy, while also reducing hiring costs and incentivizing companies to hire new employees. A worker could have received as much as an extra $248 per paycheck if their employer participated in the program. But come January, the money that went unpaid to the feds for four months will need to be paid back. That means employees could see as much as 12.4% withheld per pay period from Jan. 1 through April 30.
Here’s how you can find out whether or not the payroll tax holiday has been affecting your paycheck, and, if it has, how to prepare for when it ends:
Payroll Tax Holiday Eligibility: Who Participated?
The tax holiday was only made available for employees making less than $104,000 a year, but not everyone who qualified will be affected. Many private employers simply decided not to participate at all in the program. Guidance from the Office of Management and Budget required federal agencies to partake in the payroll tax deferment, but private employers were able to choose whether or not to take the offer. Back in September, many large companies including UPS, FedEx and CVS issued statements that they would not be participating, citing the burden it would place on employees to pay back the money owed in 2021 and the challenges to updating payroll systems.
“While there are no official numbers, what we’re hearing is that participation has been very low among private employers,” says Stephen Miller, a certified employee benefits specialist with the Society for Human Resource Management.
2020 Payroll Tax Holiday: Did You Get a Bigger Paycheck?
According to Miller, employers were obligated to notify workers if the company planned to take advantage of the tax holiday, but employees “were not given the opportunity to opt out.” If you’re unsure whether or not your employer has been deferring your tax withholdings, the easiest way to find out is to ask your manager or contact human resources. You can also check your most recent pay stubs: the U.S. federal payroll tax listed as FICA is usually 7.65% of your gross earnings, with 6.2% going towards Social Security and 1.45% to Medicare. If your employer isn’t currently paying into Social Security, that tax will only be 1.45%.
How Your Paycheck Could Be Affected in 2021
While most workers employed by private companies haven't been affected at all by the payroll tax holiday, certain low-income employees are the ones who will be hit hardest when the program ends and the deferred taxes have to be paid back. “If you’re earning the maximum eligible amount then it probably won’t be so impactful, but say you’re making $30,000 or less, that’s a different story,” says Miller.
As of right now, the Biden administration has made no public statements as to whether or not any changes will be made to the repayment process once the president-elect is sworn in on Jan. 20. The options floated include extending the repayment period to make less of an impact on paychecks, or just forgiving the missing tax dollars altogether. However, opponents of forgiveness say it would be unfair to those whose taxes continued to be withheld, and it could destabilize Social Security by reducing the amount of money in its dedicated funding source. There is also some concern regarding the possibility of workers who were laid off or quit during the payroll-tax deferment period — and who therefore will (probably) never pay back the money.
“It’s something to be mindful of, but as far as I know there’s no mechanism to dock employees on their income taxes if they left their job during this period,” says Miller.
That being said, there is still a slight possibility that the extra 6.2% added to some workers’ take-home pay pushed them into a higher income tax bracket for 2020, and every dollar above a certain threshold will be taxed at a higher rate.
If you did see higher paychecks in late 2020 due to the payroll tax holiday, it’s a good idea to start preparing now for smaller paychecks in the months ahead. It's probably best to operate under the assumption that no changes will be made to the current payback plan, and perhaps figure out ways you can temporarily lower your budget in the new year if you think you’ll be impacted.