Welcome to the Weekly SUMmary - 09/04/2020
This week, some employers may be utilizing the Payroll Tax Holiday. Before we look at options of how to handle this, let's cover the basics.
The Payroll Tax. What is it?
Tax paid by employers and employees. If you happen to be self-employed, you pay all of this tax.
What programs do the taxes fund?
Government programs, such as Social Security and Medicare. The current "Holiday" related to the Social Security portion of this tax which is 6.2%, from the employee and from the employer, equating to 12.4% of total pay.
I'll let you do some more research, via the references below, but IF you as an employer decide to utilize this "Holiday," or you as the employee are informed by your employer that they are utilizing, here are some items to consider.
- This is currently a temporary "Holiday" beginning with pay period 09/01/2020, expiring 12/31/2020.
- President Trump has informed us that these taxes will permanently go away, if he is reelected. If he is not reelected, we have no knowledge that any change to the taxes pre 09/01/2020 will take affect.
- All payroll taxes would need to be repaid by both employer and employee, likely in the form of withholding from future pay. Another aspect relating to this is, IF reelection happens, Congress ultimately makes the decision. There is no guarantee that this would be an immediate change. Therefore, this is a large gamble that may need to be repaid.
Additional considerations:
- Employers may want to keep these funds in a separate account for possible repayment.
- Employees may want to consider keeping these funds in a separate account for possible repayment. There are a variety of ways to do so. Since the funds will be after tax, you can keep them in a bank account, brokerage account, or put them in a retirement account. Roth IRA accounts, for your information, can have distributions without penalty of all contributions, at any time.
Let's look at the pros and cons.
Pro
- You continue to receive the same paycheck, but more funds are in your retirement account, that may be accessible if necessary.
Con
- If invested, the investment are subject to market fluctuation and if less than contributed, and forced to pay back the tax next year, one would need to come up with additional funds for repayment.
If you'd like to discuss further, reach out, I'd be happy to connect.
IRS
CNET article
Tax Foundation
https://taxfoundation.org/what-are-payroll-taxes-and-who-pays-them/
This is meant for educational purposes only. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (09/20)