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Why Some Workers May Need to Prepare for an Extra $2,232 Tax Bill in 2021

Heads up: You may owe the IRS more money next year.

Maurie Backman

Remember that second stimulus check so many of us were holding out for? At this point, it may not arrive until October — if it arrives at all.

Lawmakers have been deadlocked on a second COVID-19 relief bill that should, in theory, allow for a second direct stimulus. Until such a bill is signed into law, that money can’t go out.

Why the delay? It boils down to Democrats and Republicans not seeing eye to eye on a number of key issues, and unemployment is a big one. But President Trump has made it clear that he’s unhappy with that lack of progress, and to that end, in August, he signed a number of executive orders designed to provide relief in the absence of an approved bill.

Earnings statement on wooden surface with pen and calculator next to it

Image source: Getty Images.

One of those executive orders included a payroll tax break — something the president was initially pushing to include in an official stimulus package. Specifically, that order seeks to defer employee payroll taxes from Sept. 1 through the end of 2020.

At face value, that sounds like a good thing. With payroll taxes deferred, Americans will get more money in their paychecks at a time when they really need it. The problem, however, is that the president’s order does not forgive those taxes entirely, which means that a lot of people could be facing a whopping tax bill in 2021.

Will the president’s payroll tax break cause more problems than it’s worth?

Employees pay a 6.2% payroll tax on earnings of up to $137,700 that’s used to fund Social Security. The president is seeking to let workers earning up to $104,000 per year defer those taxes starting in September through the end of the year. For workers earning the maximum $104,000, that results in an extra $124 per week, or $2,232.

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Meanwhile, the president has said that if he’s reelected in November, he’ll seek to permanently forgive those four months of deferred payroll taxes. But that’s by no means guaranteed to happen. For one thing, the president may not actually have the authority to do so. Furthermore, permanently forgiving those taxes would be an enormous blow to Social Security — a program whose financial woes predate the pandemic.

As such, those who get the maximum tax deferral this year may be on the hook for a $2,232 tax bill come 2021. And that’s something today’s workers need to be aware of.

The whole point of deferring payroll taxes is to give Americans more money to spend in the near term. The economy, which is currently in a recession, needs money pumped into it in a very desperate way. But workers who get extra money in their paychecks starting in September would be wise to stick it directly into a savings account, since there’s a good chance they’ll end up having to pay it all back.

Of course, if the goal is to pump money into the economy, a second stimulus check would achieve just that. But until lawmakers are able to come to an agreement on a relief deal, boosted paychecks that may or may not get spent will just have to do.


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