4 Ways to Stop the Payroll Tax Cut From Cutting Your 2021 Salary

If your employer stops withholding Social Security taxes from your pay, expect to make less money in early 2021.

The IRS finally issued long-awaited guidance on the payroll tax cut ordered by President Donald Trump in August – just four days before the new rules take effect on September 1.

Under the new guidelines, employers who fail to withhold payroll taxes between September and December 2020 will be responsible for withholding those taxes in the first four months of 2021.

Translation: if you get a bigger paycheck in the last four months of 2020 due to temporary payroll tax relief, don’t be surprised if you have lean paychecks between January and April of the year. next, due to more withholding taxes.

“Essentially, the Treasury Department appears to be encouraging employers to cease withholdings through year end and then double withholdings for the first four months of 2021,” wrote Joe Bishop-Henchman, vice president of tax policy and litigation for the National Taxpayers Union, in a blog post last week.

What if you no longer work for your employer in January? The guidelines say your business can “arrange to otherwise collect” the taxes you owe.

No word on how they would if you no longer earn a paycheck that they can withhold money from.

Why you will have to repay your reduction in social charges

Trump issued four relief orders in August, one of which orders the Treasury Department to temporarily stop collecting Social Security taxes for people earning less than $104,000 a year. Social Security taxes amount to 6.2% of the first $137,700 of earnings for most employees.

But Trump’s payroll tax cut isn’t really a tax cut. Reducing taxes requires changes to tax laws, which Congress must approve.

So without Congress, the only thing the president can do is push the deadline back a year when a disaster is declared. This means that unless lawmakers approve a tax cut, you will owe the money sooner or later.

Of course, Congress could step in and agree to a tax-forgiving compromise, possibly in the next stimulus bill. But so far, Republicans and Democrats have opposed cutting payroll taxes, in part because it doesn’t help the millions of people who are still unemployed.

Moreover, it is likely that Congress would have to step in and fund the tax cut to avoid a Social Security deficit. Unsurprisingly, lawmakers are less enthusiastic about this prospect.

4 ways to avoid a big payroll tax bill in 2021

There are many questions about lowering payroll taxes that businesses across the United States are still struggling to answer. A pressing concern for employers is that they could be liable for the employee’s share of payroll taxes if they leave the company for any reason. Therefore, many companies are not expected to implement holdback changes.

But based on what we know so far, here are some ways to lessen the pain of a smaller paycheck or a big tax bill in 2021.

1. Ask your employer if you can opt out.

Since it seems like employers don’t have to stop withholding Social Security, don’t assume that’s something you need to worry about.

But if your employer plans to stop withholding payroll taxes, it’s worth asking if you have the option of continuing to have the money withheld from your paycheck.

Yet you may not be able to choose. Politico reports that the National Finance Center, one of the federal government’s largest payroll processors, said it would defer taxes for all eligible employees and did not mention opting out.

2. Automatically save extra money.

If your employer implements the changes, don’t spend it. Set up automatic transfers to your bank account each payday for at least the 6.2% that is no longer withheld. You can use this money to offset your lower salary in January if needed.

Consider setting up a separate account from your regular savings. This is not your emergency fund, so avoid mixing the two.

3. Adjust your deductions

Another option is to ask your employer to withhold more money from your paycheck by submitting a new W-4. This won’t prevent your employer from withholding additional payroll taxes at the start of 2021, but it will increase your tax refund. If you file quickly, you can use this money to offset your temporary pay cut.

4. Assume that you repay this amount.

Until Congress approves a payroll tax cut, assume you’ll pay back any extra money you receive — most likely in the form of a pay cut next year.

It means not spending that money. Don’t invest it. Don’t put him in debt.

The only safe thing to do is to keep this money in a bank account and treat it like money you never spent.

This article was originally published by The Penny Hoarder

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