Did your Paycheck Change?
By now you know that the payroll tax holiday floated as a means of putting extra money in the hands of employees has gone into effect. What does this mean to you, and what can you expect in early 2021?
Our government has been doing a lot of things to stimulate the economy, including direct payments to taxpayers and introducing a payroll tax holiday. By executive order, the payroll tax holiday went into effect September 1st and runs through the end of the year. During this time, participating employers will stop withholding Social Security and Medicare taxes on employees making $4,000 or less per bi-weekly pay period.
If your employer is participating in the tax holiday, here’s what you can expect:
Your first paycheck will be larger than what you are used to receiving. How much more will depend on your income. Let’s say you earn $4,000 bi-weekly. You will see an increase of $248 each pay period – a total of $2,232 over the life of the “payroll holiday.”
($4,000 bi-weekly X 6.2% tax rate = $248. $248 * 9 pay periods between September 1 – December 31 = $2,232)
Sounds pretty great, right? The catch is that unless there is new legislation put in place before the expiration of the holiday, you will see a decrease in your paycheck in 2021. The amount withheld in 2021 will be $496 per pay period for the first four months of the new year.
The decision to participate in what can best be summed up as a short term loan is ultimately up to the employer. Even if your salary range falls within the threshold, you will not necessarily see the impact on your paycheck. While it is mandatory for our government to withhold these taxes for military and federal employees, non-government employers do not have to participate.
If your employer participates, you might want to consider the following:
Don’t view the additional money as a windfall, place it into a savings account to offset the shortfall in 2021. An InFirst Custom Club Account is a great option because it earns dividends, and it’s there for you when your first quarter 2021 paychecks are anticipated to be smaller.
If you need to use the money to make ends meet, plan a budget change, and alter your 2021 expenses. Things might be tight for those of us living paycheck-to-paycheck – at least for the first four months of 2021.
If you are planning to transition away from your employer in the new year, be sure to have a plan in place to cover the taxes. Your employer may choose to withhold the funds from your final paycheck, or they may demand a lump sum payback. Whatever you do, you don’t want to be penalized for not paying the correct amount of taxes.
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Krista Kyte is a personal finance blogger and personal banker with over 18 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.
