By: JJ Montanaro, Military Affairs Relationship Director and CFP® professional
The bill is due.
Those words don’t necessarily conjure up a lot of positive mental imagery. In fact, I can follow them to some scary places … the scale following the holidays, the credit card statement after some binge shopping for gifts, a little too much celebration and, yes – here’s where I’m focused – a downsized paycheck following the payroll tax deferral. Yes, I get it. You didn’t have any say in this particular bill. However, that doesn’t change that it may be coming due in the form of an increased-size payroll tax obligation to your finances.
As a quick recap: in August, President Trump issued a Presidential Memorandum creating an optional deferral of certain payroll tax obligations for employers effective September 1 through the end of the year. As a result, some American workers, including many government employees and the currently serving, may have seen a 6.2% increase in their paychecks. “Deferred” is the operative word, however, and it has to be repaid starting in January. While we are still waiting on the final details (and they may vary from employer to employer), the IRS initially issued guidance that the deferred payroll tax would be paid back proportionately out of paychecks from January through April. However, the pandemic aid and government funding bill President Trump signed extended the payback period over the entire year of 2021. Here are some ideas as you tangle with the potential hangover of coping with smaller take-home pay:
Determine the impact. After last year, we’ve had our fill of the unexpected. Get a ballpark estimate of how your paycheck will be impacted by reducing your last paycheck in December by around 8%--that’s approximately 2% payback along with the normal 6.2% payroll tax withholding per pay period. Those currently serving will feel a bit less of a sting as they will be receiving a 3% pay increase. In any case, 8% should get you close enough to create a cash flow-coping strategy, assuming you’ll be paying the amount owed back over the full 12 months in 2021.
Use the money you already set aside. My hope is that many folks will have to do nothing more than supplement their paycheck with the money they already set aside. When the payroll tax holiday became a reality last fall, there were a lot of voices encouraging prudence. The idea of setting aside the additional income wasn’t glitzy, but like so much of the grunt work of being savvy with your money, the payoff is real: No hangover.
Build on your good work with expenditures. The pandemic has brought us all a little closer to our finances. If nothing else, our spending patterns have changed. Likely, we’ve got a bit tighter handle on where our money goes each month. Unfortunately, the payroll tax repayment represents yet another challenge. Are there services you can cut back or cut out, habits you can put on hold or purchases you can put off helping get to the other side of the recapture? It may take nothing more than a series of small decisions to take spending down a notch in certain areas – instead of full-scale elimination (a little less streaming purchases comes to mind) – to get you through the next few months and create momentum to make some lasting change for the good.
Boost your income. In 2020, a lot of folks were creative in their efforts to make side hustles a critical element of coping with the financial implications of the pandemic. That type of effort can be a key element of responding to the impact of the payroll tax repayment. A little extra cash from turning a hobby into income, extra contract work, selling some stuff or something similar could allow you to fill the gap created by the holiday tax hangover.
Reach out. One message that I hope has resonated throughout this incredibly difficult time has been, “ask for help.” That applies here as well. Organizations like Army Emergency Relief, Air Force Aid Society, Navy Marine Corps Relief Society, We Care for America and Coast Guard Mutual Aid are always standing by to assist if you’re struggling to make ends meet.
Changing jobs isn’t a free pass. Don’t forget to account for your employer’s responsibility to recapture the uncollected Social Security tax. This could result in a very small last paycheck, a bill, or some other sort of surprise if you leave the military or move on to a new employer. Just remember, there’s no free lunch for this holiday. Be sure to check with your employer to understand how this will be handled.
Pivot to normal. If there’s a word that I’ve grown tired of over the last year, it’s “unprecedented.” On the other hand, despite getting quite a bit of use, I still like “pivot.” To me, it conveys a sense of constructive action. And that’s how I’ll finish this off. Your repayment period will be over before you know it. After you successfully navigate the last paycheck impacted by the “holiday” that was the payroll tax deferral, you will experience – at least in terms of what hits your bank account – the beauty of a “pay raise.” As I’m fond of saying, that’s money that you aren’t spending and can be used to pay down debt or save. When it arrives, don’t miss out on that opportunity.
You must be a registered user to add a comment. If you've already registered, sign in. Otherwise, register and sign in.