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 $4,000 or less per paycheck, or 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 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.
As of Sept. 1, Defense Finance Accounting Services had not sent any notification to service members or DOD civilians in regard to payroll taxes being withheld over the next few months. DFAS confirmed in an email response they 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.
It is unclear if non-DOD employees themselves can opt-out of the deferment, or if they can pay the deferred taxes back ahead of tax season to avoid a hefty tax bill in the new year.
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.
For service members, this means any money withheld on a LES under the "social security" tab would compound and has to be paid back using tax form 1040 when filing taxes.
This can lead to a hefty tax bill for service members, right after Christmas, especially if they do not set that money aside to be repaid during tax season.
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
The offices of Management and Budget (OMB) and Personnel Management (OPM) also confirmed via email DFAS will start the deferment of payroll taxes this month.
"Partnering with the Office of Management and Budget (OMB) and the Office of Personnel Management (OPM), DFAS will implement the guidance according to the expectation that all Federal Civilian Payroll Providers will act in unison. As such, no Payroll Providers, Departments/Agencies, nor employees will be able to opt-in/opt-out of the deferral. The elimination of the withholding of employee deductions for the applicable employees will be effective the second paycheck in September, pay period ending September 12, 2020.
DFAS will defer the Social Security (Old Age, Survivors, and Disability Insurance or OASDI) employee deductions for all employees whose gross social security wages that are less than $4,000 in any given pay period through the end of 2020. The deferrals will apply to all federal employees making less than $104,000 per year, or $4,000 per pay period. In the short term, federal workers will see an increase in take-home pay, but absent action by Congress to forgive the debt that is effectively incurred on employees, workers will likely be expected to pay that money back sometime next year."
Service members should check their LES bimonthly to see if social security is deferred and plan appropriately to pay those taxes back in the new year.