Money Kuel Category Expert: Joy Alford-Brand
Hello from your friendly neighborhood bankruptcy attorney. Welcome to September and a fun new economic wrinkle that we all need to pay very, very close attention to. Yes, I’m talking about the suspension of the payroll tax, or payroll tax holiday. This took into effect September 1st via executive order signed by the President on August 8th
Now, what does this mean for you? As someone who is probably over forty-five years of age and possibly thinking about retirement this is critical.
First, it means that if you are still earning a paycheck, check with your employer to see if they are choosing to opt-in and defer your Social Security tax withholding from your paycheck. Then, because I’m a Type-A person, I suggest you keep an eye on your check to make sure they are doing what they said they would. If you see funds aren’t being taken out, you need to stash them somewhere safe so you can pay them back come January of 2021.
Payroll Tax Holiday Not Free Money:
“the pain of having to pay it back will likely be hard to bear”
That’s right, you heard me. This payroll tax holiday is just a DEFERRAL. These funds are NOT being forgiven. Only Congress can forgive this kind of deferral and I doubt that will happen. They will have to be paid back.
Right now, the 6.2% that is the subject of this issue (and that’s only without the 1.45% Medicare tax), will be paid back by you, the employee in one of two ways in 2021. Either, you will pay twice the amount of your usual withholding and have 12.4% withheld every pay period starting January 1, 2021 until April 30, 2021. Or, you will wind up having it deducted from your 2020 tax refund. This will probably also happen if your withholdings fall short. For example, if you lost your job in February or no longer worked as of March. Either way, the pain of having to pay it back will likely be hard to bear.
The good news, from what I can tell, is it looks like most employers are opting out of the deferral. This means they are not giving their employees the option to defer the withholdings. Except, of course, for the federal government. They are automatically being enrolled in the deferral program. So, keep that in mind if you are an employee of the federal government. My suggestion, start saving money for it immediately! No matter what, check your paystub to see what’s coming out now and continue keeping an eye on it until December 31st. Then save as much as you can to avoid getting caught unawares come tax time.
Long-Term Effects On Social Security:
“Your withholdings are being paid out to people who are getting Social Security payments now.”
The second thing you need to know about this payroll tax suspension is the potential effect on Social Security long term. As a demographic that is getting closer to the age where you’ll be enrolling in the Social Security and Medicare programs, please note that this deferral can impact the available funds in the long term. However, it is likely that we will still have access to Social Security. This is especially true since most employers are sensibly opting out of the deferral.
Even so, the truth is that most people really don’t understand how the Social Security system works. They think that the government takes their money and holds it just for them. I hate to burst your bubble but, that’s not the case at all. Your withholdings are paid out to people who are getting Social Security payments now. That includes elderly people, as well as, people who are disabled AND children of deceased parents. By the way, I know at least one elderly person who relies on that payment as their sole source of income every month and who can’t afford to live without it. Odds are that you do, too.
While there are funds in the Social Security trust fund to fall back on, there aren’t enough to sustain the program long term. At least not without being replenished, or having the opportunity to continue earning interest (like you should be doing with your savings). This is why I am constantly beating the drum for financial empowerment. We need to get away from the fact that by default, we put ourselves in a position where the government now makes critical financial decisions for us.
Wait No Longer:
“Do not wait to be vigilant.”
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 is 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!
Don’t forget, my FREE Financial First Aid Kit that you can find in the Kuel Life Shop. This Financial First Aid Kit is intended to help people who are in an immediate financial crisis and need help figuring out how to get stable. Once you are stable, you will achieve financial empowerment. You will have the security and peace of mind you need to respond to any situation free from worry or concern about what the future holds. Be safe and stay healthy! And remember: the payroll tax holiday is NOT FREE money. You will pay it back.
About the Author:
Joy Alford-Brand is an author, public speaker and attorney. She graduated with Bachelor’s Degree in History from Wright State University in Dayton, Ohio in 1994 and she received her Juris Doctor from Ohio State University College of Law in 1998. Her main area of practice is Bankruptcy. She is admitted in North Carolina where she lives and works. Joy founded newcashview.com in 2015 as a platform through which she could help others work toward financial freedom and peace of mind! For more information, check out newcashview.com.