If You Are Still Employed and Need Extra Cash: Eliminate Voluntary Payroll Deductions

[Laidback Al]

Not everyone has lost their job. But there are things you can do If you are receiving a reduced payroll check and you still need extra income. Consider stopping all of the voluntary payroll deductions, such as group life insurance, credit union deductions, nontaxable 401K deductions, Health Saving Account (HSA) deductions, etc. The side effects of stopping voluntary payroll deductions is that you may have to pay more taxes in the short run, but this will increase your take-home pay that you might need right now. Talk to your employer first to make sure that stopping these deductions does not permanently bar your from restarting them in the future when your life is more financially stable.

 

[alert]

I'm going to disagree with a couple of the above suggestions, and suggest a couple alternatives.

This is NOT the time to cut back on life insurance premiums or disability premiums. Those rates were calculated in a world without a pandemic and are likely fixed for the entire year 2020. Your risk of dying or becoming disabled now is higher than it's ever been, because of the pandemic virus. If you thought such insurance was a good idea last year at open enrollment, it's an even better idea now. The worst thing you could do is eliminate such insurance and then need it.

You might consider reducing the amount of federal and/or state income tax withheld from your paycheck by claiming extra exemptions. I am NOT a lawyer or a tax professional, but I do file my own taxes each year. Every state is different (my state tax is a flat rate so cannot be adjusted), but the federal government and many states allow you to pay your tax liability whenever you want without penalties by payroll withholding (this statement is NOT true for estimated tax payments made directly to the IRS, however) as long as your liability at end of the year is not above a certain amount. You would presumably increase your withholding to above normal later in the year to pay back what is essentially an interest-free loan. There are a few complications here, and you should consult your tax professional for your own situation, but this seems a far better alternative than cutting back your life insurance during a pandemic.

In fact, for the majority of people who get a refund from the IRS each year, adjusting your withholding by any amount less than the expected refund would have no consequences at all and would give you access to your refund early.

 

[Laidback Al]

Alert is correct about insurance premiums, do not cancel them as you may need them this year. Also, before you cancel any voluntary contributions make sure that there are no penalties for restarting them.

Alert is also correct about the taxes withheld by employers and reported on your W-2 forms. These paid-in taxes are considered by the IRS to have been paid equally over the entire year eliminating the need to worry about estimated tax payments. Claiming extra exemptions now and having your employer withhold additional taxes at the end of the year is a good strategy if your HR department is willing to make special changes on your individual payroll deductions. However, many employers have automated systems or used 3rd party payroll processors that may or may not be able to accommodate these requested changes in a timely manner. Also, it might be a struggle to have less take home pay in November and December just when the holiday season is arriving.

If your are not familiar with doing your own taxes as alert is, this strategy may not be transparent and understandable to you, so be cautious.

Alert 's final points is the most important one. Do not give the US government an interest-free loan of your money with the goal of receiving a big refund check next year. Carefully review your W-4 form - do not purposefully underestimate your dependents (resulting in more taxes being taken out) and do not ask for additional withholding on your paycheck. Only pay the approximate amount of taxes you owe. When you receive a big refund next year, it is not "free" money. It is money you earned throughout the year, money that you may need right now during this crisis.