Payroll tax: That’s what your employer withholds from your every paycheck to send to the government. If it weren’t for your employer withholding this, you would have to shell out your entire tax payment come April 15th.
Needless to say, payroll tax withholding is nice because it takes the confusion out of paying taxes (ok, only some of the confusion). However, in August, President Trump announced that because of an Executive Order he signed, there would be a payroll tax holiday from September 1st to December 31st of 2020.
This was to help combat the economic woes that arrived with Covid-19. The intention, according to the president, is for this payroll tax to be forgiven. However, this could be h entirely dependent on how the election goes this November. President Trump says if he is reelected, he will have the payroll tax forgiven for the last quarter of 2020. If not, there are no guarantees that this will be forgiven (honestly, there aren’t any guarantees if he is reelected either).
How this applies to you
Each company is given the opportunity to choose if they want to continue withholding taxes for their employees or take advantage of the payroll tax holiday. In the case for me and Bailey, both of our companies chose to continue withholding payroll taxes from our paychecks.
We don’t have to do anything to prepare for tax season. We just keep managing our finances like we’ve always managed it.
However, many companies and organizations are not withholding payroll taxes for the last three months of the year. This means that if the payroll tax is not forgiven, these company’s employees will be responsible for paying back that tax next year.
Here’s an example
Let’s say you get paid $1000 gross (that means before taxes) for every paycheck. If payroll tax is 7.5%, that means $75 are withheld from each paycheck, leaving you with $925 after taxes. If you get paid twice a month, that means you are paid $8000 during the tax holiday and $600 would normally be withheld by your company for payroll tax.
If your company continues to withhold tax, nothing changes for you. If your company does not withhold taxes during the payroll tax holiday, you would receive $600 more than normal over the last 4 months of the year.
Here’s the kicker: If congress forgives that $600 that was not withheld for payroll tax, you’re good to go. If it is not forgiven, you’ll be responsible for paying back that $600 to the government.
Let’s make this even simpler.
Here’s what you need to do
Ask your HR department if they are still withholding taxes or not. If so, you don’t have to do anything. If not, take that money and throw it in a savings account. Don’t touch it!
Pretend like that money doesn’t exist. Then, if they payroll tax is not forgiven, you can pay it back without issue. If it is forgiven, you can take that money in savings and use it for whatever you need (I recommend debt payoff is that applies!).
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