What does the payroll tax deferral mean for your paycheck?

In early August, President Donald Trump issued four executive orders intended to mitigate the economic pain of the coronavirus pandemic. The orders addressed federal student loan payments, unemployment, evictions and payroll taxes.

The last executive order, which defers the 6.2% tax that employees pay into Social Security, went into effect Sept. 1. People who earn less than $4,000 per biweekly pay period and whose employers opt in to the deferral will not have to pay that tax until Dec. 31. However, the taxes are only deferred, not cut entirely: Employees will face double withholdings from January through April to even things out, meaning smaller paychecks during that time.

The executive order also puts the onus on companies, not individual employees, to take action; companies have to opt in to the deferral and are responsible for making sure that the deferred amount is paid to the Internal Revenue Service by April 30, 2021.

The order has raised concerns that many people will be unprepared to have smaller paychecks in the spring.

"The employees are going to get a shock," Nicole Davis, certified public accountant and founder of Butler-Davis Tax and Accounting in Conyers, Georgia, told CNBC earlier this month. "Most people live paycheck to paycheck. ... They will find themselves between a rock and a hard place when their paycheck is less."

Do you have any choice in accepting the deferral?

According to Mark Hamrick, a senior economic analyst at Bankrate, a personal finance company, employees won't have much of a choice in accepting the deferral if their employer decides to opt in to the program.

"My recommendation is that people initiate a conversation with their supervisor or human relations department if they haven't heard otherwise to ask about what the organization is doing on this," Harmick said.

However, the program is likely to be too complicated for employers to allow employees to make individual choices. "I don't think it's practical to expect that an organization would allow employees to opt in or opt out, potentially creating a logistical nightmare for the employer," Harmick said.

How will you know if your paycheck is affected?

The executive order does not require communication from employers about whether the program is being adopted. If your company does not inform you of their plans, keep an eye on your paycheck to see if it's higher than usual for any reason, and check the deductions section of your paycheck.

What will you see in your paycheck?

Since the Social Security tax is 6.2% of your paycheck, that means you'll see an increase in pay of 6.2%. An employee who regularly makes $2,000 per paycheck after taxes can expect to make approximately $124 more per biweekly pay period.

However, when double withholdings are taken out beginning in January, you'll be paying twice as much in Social Security tax. An employee who regularly makes $2,000 per paycheck after taxes may only make $1,876 per pay period from Jan. 1 through April 31.

"It is far from clear that the payroll tax holiday will achieve its intended objective of, as the president said, 'Save American jobs and provide relief to the American workers,'" Harmick said. "The action is a deferral of these taxes, not an elimination of them. So, the bill is still due, it just isn’t due in the short term."

And there may be additional complications for those who leave their jobs after benefiting from the executive order but before the double withholdings are taken out from their paychecks, Pete Isberg, vice president of government affairs at ADP, told CNBC.

"There are situations like job changers and seasonal employees who work through December ... Maybe their last paycheck is Dec. 30 and that’s the only opportunity that employer will have to recover those deferred taxes or else the employer will be liable for it," he said, suggesting that in those cases, the full amount of tax owed may be deducted from a final paycheck or removed from future paychecks at a new company.

Theoretically, it's possible that Congress could vote to forgive the deferred tax amount, but Harmick believes there is "no chance whatsoever" that that would happen.

"It would effectively defund Social Security ... If payroll taxes were eliminated, as the president has suggested he would like to do, essentially the Social Security trust fund would be unable to pay benefits as early as 2023," Harmick said.

What should you do now in anticipation of double withholdings?

Harmick and other economic experts recommend that anyone whose income is affected by the executive order save money so they have a cushion when more taxes are taken out of their paychecks in 2021.

"This is a holiday in which the work continues to pile up on your desk when you’re gone, and you take care of it when you come back," Robert Delgado, principal at KPMG in San Diego, told CNBC. "I’d say employees have to clearly understand this isn’t forgiveness, it’s deferral."

"If an employer does take part in the deferral, it would be my strongest suggestion that workers try to save that money, because they’ll be facing a shortfall in income come the first of the year," Harmick said.

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