President Trump recently signed an executive order that will defer payroll taxes for all employees, including service members, from Sept. 1, 2020 to Dec. 31, 2020. The move was made to increase the funds federal employees have over the next few months so they will be able to help stimulate the economy, and to help with any financial burdens caused by COVID-19, according to the memorandum.
“This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most,” Trump stated in the August guidance to the Secretary of the Treasury.
The payroll tax deferment only applies to those who make less than $104,000 per year. In military terms, this applies to the ranks of E-1 up to O-4 if no additional income is applicable. The memorandum also notes anyone making less than $4,000 per paycheck if paid on a bi-weekly basis are subject to the tax deferment. However, service members and DOD civilians are paid on a semi-monthly basis, receiving only 24 paychecks per year versus 26 paychecks per year on a bi-weekly pay term. Therefore, if a service member’s paycheck is over $4,000 the deferment still applies to them if they make less than $104,000 annually.
The complicated nature of payroll taxes and the lack of guidance on implementation has created confusion for many. The memorandum put out by the president does not address if the deferment is mandatory for federal employees, and some tax experts believe that businesses may continue withholding the taxes from employees simply because it will be too complicated — and expensive — to change payrolls for just a portion of their employees.
DFAS confirmed in an email response it would begin deferring payroll taxes on Sept. 12 and continue to defer those taxes until the end of the year. Defense Department Federal employees, including service members, do not have the option to opt-out of the deferment program.
However, DFAS published an official statement on Sept. 6, 2020, stating any service member with a monthly rate of basic pay less than $8,666.66 will be subject to the tax deferral. The amount deferred will be 6.2% of the rate of basic pay, which is the Social Security tax. It is labeled as “FICA-SOC SECURITY” on a service member’s LES. DOD civilian employees who make less than $104,000 per year will also be subject to the tax deferral program. It is labeled as OASDI on a DOD civilian’s LES.
It has to be repaid
It is important to think of the payroll tax deferment as simply a “tax loan.” Although Trump said in an earlier press conference that he would like to make this deferment permanent, which would require an act of Congressional approval, it currently stands that any payroll tax funds that go into a federal employee’s pocket for the next few months will have to be repaid by Apr. 30, 2021, according to IRS Notice 2020-65.
In the statement made by DFAS, the tax deferment amount will be taken from wages starting in January 2021.
“Per IRS guidance, collection of the deferred taxes will be taken from your wages between January 1 and April 30, 2021 for both military members and civilian employees. Additional information on the collection process will be provided in the future,” the statement said.
You can read the full statement made by DFAS here.
The intent
The purpose of the payroll tax deferment is to provide relief for those in need, Lacey Langford, The Military Money Expert®, stated in an email.
“If you need the money to pay your bills, then yes, spend it on your bills. Do not spend in on wants like trips or new clothes. If you don’t need the money, it’s best to put it aside in a savings account,” Langford said.
DFAS will participate in the tax deferral program
In the statement made by DFAS on September 6, 2020, all service members and DOD civilian employees will participate in the tax deferral program. There is no opt-out option.
“Military members are not eligible to opt-out of the deferral if their Social Security wages fall within the stated limits. The deferral will happen automatically. Civilian employees are not eligible to opt-out of the deferral if their Social Security wages fall within the stated limits. The deferral will happen automatically.”
In addition, if a military service member retires or separates before January 2021 when the taxes will begin to get repaid, they will be responsible for paying those taxes back but is unclear exactly how it will be collected.
“Additional information on the collection process will be provided in the future,” says DFAS.
Service members should check their LES bimonthly to see the amount of social security that is deferred and plan appropriately to have those wages taken out of their paycheck, in addition to the normal 6.2% of social security tax withholding, in the new year. In other words, starting in January 2021 through April 2021, service members and DoD employees can expect that 12.4% of their basic pay will be withheld from their paychecks, and should plan appropriately.
