Money Honey Rachel

Money Honey Rachel

coronavirus

What You Need to Know About the Sep 1 Payroll Tax Holiday

On September 1, 2020, the Payroll Tax Holiday took effect. There’s a lot of confusion around what it is and how it works, so I’m going to clear that up now.

Here’s the skinny on President Trump’s deferred payroll tax plan:

  • The plan defers payroll taxes (not eliminates, forgives, or cancels)
  • Only the 6.2% tax that employees pay towards Social Security is deferred (not all payroll taxes, and no income taxes.)
  • It only impacts employees (not those without jobs), and only if their employer has opted into the plan. Employers can participate if they want. If your employer decides to participate, you cannot opt out.
  • Takes place from Sep 1, 2020 through Dec 31, 2020
  • Federal employees will be opted in
  • Applies only to employees or federal employees making less than $4,000 per paycheck (biweekly)
  • This tax must be repaid. If your employer opts in, then your employer will collect additional (double) Social Security tax amounts from employees’ paychecks starting Jan 1, 2021 through April 30, 2021.
  • If you don’t or can’t pay back the taxes owed on time (by April 30, 2021), you will be subject to penalties and interest

Here is what we still don’t know:

  • We don’t know whether or how many employers will actually participate. So far, complications and uncertainty have been so problematic that few businesses have expressed any interest.
  • We don’t know whether these taxes will ultimately be forgiven. As it stands now, this is only a deferral.

So: what do you do with this information? Here is what I strongly recommend:

If your employer participates in the deferral, set this money aside in savings. Do not touch it. Because come Jan 1, you will have to pay double your regular Social Security tax rate, and if you can’t afford to do so, you’ll have to pay interest and penalties on the amount still owed if it’s not paid back on time.

Rachel Richards is a former financial advisor and bestselling author. ,You can download her free budgeting and net worth worksheets here.

What to do with your $$ while your student loan interest rate is 0% during Covid

Hello, Honies! I’ve received tons of questions over the past few months about what to do with your money while your student loan interest rate is 0% (due to Covid.)

There are some SUPER important things to keep in mind if you opt not to make payments towards your student loans during this time.

First, allow me to introduce the concept of interest capitalization. When you are in deferment or forbearance on your student loans, traditionally this fun thing called “interest capitalization” happens (hint: it’s not fun at all.) Interest capitalization means that interest is still accruing even during forbearance. When forbearance is over, the accrued interest is added to the principal balance of your loan. If you have a large balance, this can easily add tens of thousands of dollars to your total balance when forbearance is over.

Whether we are in the Covid crisis or not, you must be aware of interest capitalization when considering forbearance.

Now, onto the Covid stuff. In March 2020, the president signed the CARES Act to provide relief for federal student loan borrowers. The CARES Act automatically places federal borrowers into temporary forbearance until September 2020, which means you can stop making payments.

During this time, interest is being temporarily set at 0% on certain types of federal loans owned by the Department of Education:

  • Defaulted and non-defaulted Direct Loans
  • Defaulted and non-defaulted FFEL Program loans
  • Federal Perkins Loans

Private loans are NOT covered by the CARES act! If you are unsure whether your interest is set to 0%, contact your loan servicer directly.

When it comes to interest capitalization during this time, keep in mind that:

  • 1. If you consolidate your loans in any way during this time, you could be subject to interest capitalization.
  • 2. If you were in deferment/forbearance or had defaulted prior to March 2020, you MUST call your loan servicer to see whether you will be subject to interest capitalization during this time.

You can opt to continue making full or partial payments during this temporary forbearance, which in most cases, will be applied 100% towards your principal balance.

Steps to take to decide where to put your extra $$ during this time:

  • Ensure your loan qualifies for temporary forbearance under the CARES act (call your loan servicer directly)
  • Ensure you will NOT be subject to interest capitalization (call your loan servicer directly)
  • If you qualify AND are NOT subject to interest capitalization, I recommend paying off other high-interest debts during this time (and/or building up your emergency savings fund)
  • If you do not quality, or you ARE subject to interest capitalization, I would recommend continuing to make payments towards your student loans

Additional information on the CARES act and student loans: ,https://studentaid.gov/announcements-events/coronavirus#zero-interest-questions

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