In an effort to provide financial relief during the coronavirus pandemic, an executive action was signed to allow employers to defer payment of employee-side Social Security payroll taxes through the end of 2020 for Americans earning less than $100,000 annually, i.e. a payroll tax deferral.
This payroll tax holiday, which lasts from September 1 to December 31, means that if you are working and fall within the income limits specified, you will be temporarily excused from paying the 6.2% Social Security tax each payday. In the short-term, this puts money back into your pockets. But what happens when it must be paid back? What should you do with your payroll tax deferral?
4 Ways to Take Advantage of Your Payroll Tax Deferral
While it is important to understand that you are required to pay back any deferred payroll taxes next year, the specifics have yet to be established. In the meantime, let’s look at how you can use this to your advantage.
Most importantly, you need to make sure that you will have enough cash to pay back the deferred taxes when the time comes. You may choose to put aside an amount each month to cover these expenses, or if you are comfortable with your ability to pay them at a later time you can put that extra money to use in a few ways.
1) Catch Up on Bills
This pandemic has been hard. If your paychecks have suffered, you may be behind on bills. If you have fallen behind on rent or utilities, use this extra cash to get caught up. But make sure you are focusing on priorities.
Furthermore, if you are still struggling despite the benefit of the payroll tax deferral, speak to your creditors and billers. There may be options available such as lowering your interest rate, waiving late fees, or temporarily pausing payments.
2) Emergency Fund
Having an emergency fund is one of the best ways to prepare for unexpected financial hardships. If you have been able to pay bills throughout this pandemic, you can choose to save this extra money. Emergency savings can be a lifesaver during unexpected illness, job loss, and other unexpected expenses.
3) Pay Down Debt
If you expect to have extra money from the payroll tax deferral, apply it to your debt. High-interest debt can wreak havoc on your financial plans and prevent you from reaching your goals like saving and investing for retirement. Paying more in interest means it takes longer to pay those debts off. Even with lower-interest debts, the interest charges add up over time.
4) Invest It
If you have an emergency fund, debt repayment is under control, and your monthly bills are current, you may opt to use the payroll tax deferral money to invest. If you already contribute to a 401(k), you may be able to temporarily bump up your contributions with the extra money. Or you may choose to put it into an individual retirement account, which may allow you to grow your money will also enjoying tax benefits.
[Related: Investing During COVID]
Need Help Determining What to Do With Your Payroll Tax Deferral? We Can Help!
There are still several unanswered questions about this tax deferral and how repayment will work. Until there is further guidance, we can only do our best to be prepared for the situation. If you would like to take advantage of your payroll tax deferral but aren’t sure how, let one of our experienced financial advisors in Northern Virginia help!
Contact us online today or call (833) 568-4900 now to learn more.