How the Mandatory Payroll Tax Deferral Affects Federal Employees

Oct 23, 2020

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You may have recently come across news stating that President Donald Trump issued an executive memorandum authorizing employers to defer Social Security tax deductions from employees’ paychecks between September 2020 to December 31, 2020. This is a particularly important topic to cover as it will affect federal workers differently than private sector workers.

This executive order makes the payroll tax deferral mandatory for most federal and military employees. Which has caused many federal employees to worry about their current and future payroll along with any Federal Disability Retirement or OWCP benefits they might be receiving.

Financial changes can be very stressful which is why we are here to break down what this payroll tax deferral means and hopefully answer any questions you might have, in hopes of alleviating your worries.

What is the payroll tax deferral?

The <a href=”” rel=”no_follow noopener” target=”_blank”>MEMORANDUM FOR THE SECRETARY OF THE TREASURY </a> states that “The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000 after pre-tax deductions like health insurance premiums and flexible spending and health savings account contributions.”

This means that the 6.2% tax that is used to fund Social Security will NOT be withheld from your paycheck until December 31, 2020 if you make less than $4,000 pre-tax during a bi-weekly period.

Why is the tax withholding happening?

This order has been put in place to help Americans during the COVID-19 pandemic. Americans have struggled to make ends meet due to loss of wages or hours, so the social security tax deferral is a way to ensure that there is extra cash going into American’s pockets to help with necessities such as housing, food, medical expenses and childcare.

What’s the Catch?

While on the surface this might seem like a great opportunity to make more money, there’s a catch. Starting January 1, 2021 up until April 30, 2021 any taxpayer that had applicable taxes deferred from their pay from September to December 31, 2020 will have to pay all deferred taxes back in full. This payback will occur at the same time that the normal 6.2% tax will be reinstated.

How will my pay change?

These changes mean that you could have a bigger paycheck for the rest of this year but for the first 4 months of 2021 you will have a smaller than normal paycheck. This is because you would basically be paying 2x the normal 6.2% social security tax since you have to payback what was deferred the year before.

“The Interior Department’s Interior Business Center, which handles payroll processing for more than 150 government agencies and offices, issued its own memo last week confirming that employees at the agencies it serves will see the deferral beginning in the paychecks slated to go out on either Sept. 18 or Sept. 22, depending on the agency.” – <a href=”” rel=”no_follow noopener” target=”_blank”>Government Executive</a>

How does this directly affect federal government workers?

The U.S issued a mandatory tax deferral order that will affect an estimated 2.2 million federal and military employees. This mandatory tax deferral will affect the 22 executive branch agencies. The tax deferral for federal and military employees applies to anyone who earns up to $4,000 on a biweekly basis, and less than $104,000 annually. However, this mandatory order does not affect every federal employee across-the-board.

The International Business Center stated that Judicial Branch agencies may decide whether to opt-in or opt-out of the payroll tax deferral. Employees of these agencies can find out more information from their employer through newsletters, announcements or contacting their department in charge of payroll.
Also, in a statement on Tuesday, the Postal Service indicated that it would not implement the controversial deferral for its more than half a million employees.

“Employees would still be required to repay the deferred taxes between January and April next year. These deferred payments would be in addition to next year’s taxes . . . After thoroughly considering the impact on both employees and the organization, the Postal Service has elected not to implement the payroll tax deferral.”

There have been a few announcements from multiple government agencies trying to give information to their employees on this mandatory payroll tax deferral to clear up any confusion since it does not go into effect for 100% of all federal and military employees.

How does this affect my Federal Disability Retirement Annuity and OWCP Wage Loss payment?

The social security tax deferral will not affect either one. Federal Disability Retirement Annuity will not be affected because it does not pay into Social Security taxes anymore, so there is no Social Security tax to withhold.

Office of Workers Compensation Program benefits are not subject to taxes so it will not be affected because there will be no tax to withhold.

What happens if I can’t pay it back?

If you are a federal employee that will have taxes deferred this year, then it is your employer’s responsibility to ensure that the right amount of taxes is withheld next year for both the employee and employer to avoid a tax bill.

If the amount owed is not paid off before April 30, 2021 then interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid applicable taxes.

The only way federal workers will not have to pay back the mandatory deferred taxes is if Congress passes a legislation that forgives the tax deferral, but as of now they have yet to do that.

We work each and every day with federal employees and help them navigate the confusing world of federal employee benefits. We understand that this might be a stressful time, full of confusion and worry, and our team is ready to help. If you have any questions, please Contact Us and schedule a time to speak with our team of professionals.

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