The payroll tax deferral that President Trump enacted via executive order began at the start of September. Although a number of private sector employers have opted out of it, federal employees will not have that option.
So what does this mean? Federal employees who make less than $104,000 annually will see bigger paychecks starting this month and lasting through the end of the year. The 6.2% payroll tax will be deferred from eligible federal employees’ paychecks until the end of the year.
While having a bigger paycheck sounds appealing, not everyone thinks it’s a good idea. A group of Senators sent a letter this week to Treasury Secretary Steven Mnuchin and White House Office of Management and Budget Director Russell Vought urging them to let federal employees have the option of whether or not to have their payroll taxes deferred.
“We urge you to let federal workers and uniformed service members choose whether to defer their payroll tax obligations under IRS Notice 2020-65, rather than forcing them to participate. Federal workers and service members should not be used as pawns for a payroll tax scheme that many private sector employers are unlikely to join and where key questions remain unanswered,” wrote the group of over 20 Senators. The effort was led by Senator Chris Van Hollen (D-MD).
The Senators also wanted answers to some questions about how the payroll tax deferral would work. Specifically, they asked for answers to these questions:
- If an employee or service member separates from their job prior to repaying deferred payroll taxes in their 2021 withholdings, will their employing agency or the IRS seek to collect unpaid payroll taxes from that employee? If so, how will they do so?
- Please provide us with a cost estimate for federal agencies to pay the employee payroll taxes that they are unable to withhold or otherwise recoup as a result of the deferral.
- How will federal agencies communicate key information about the payroll tax deferral to their workers, particularly regarding the reduction in take-home pay in 2021? As KPMG stresses, “It is important to manage employee expectations and keep employees informed of their obligations prior to making the election to defer.”
Some House lawmakers have made the same plea to allow federal employees to opt out of the payroll tax deferral.
Paying Back the Taxes
The primary cause for concern is that the measure is a tax deferral. Consequently, this means the taxes will still be owed in the first part of 2021 and would be due by the end of April with the way things stand right now.
It is possible that the taxes will be forgiven. President Trump said in the executive order that “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred…”
Federal employees, however, should not get their hopes up. Forgiving the taxes would require that Congress pass legislation, and that seems like an unlikely prospect. In fact, House Ways and Means Social Security Subcommittee Chairman John Larson (D-CT) introduced legislation (H.R. 8171) to overturn President Trump’s executive order on deferring the payroll tax. Democrats in the Senate have also been working to overturn the payroll tax order.
How the taxes will be paid back isn’t immediately clear. It may be that agencies just withhold larger amounts from federal employees’ paychecks after the first of the year to recoup the deferred taxes. That would mean affected employees would see smaller paychecks during the first few months of 2021.
Any federal employees who have their payroll taxes deferred would be wise not to spend the money right away. Instead, look at a recent paystub to see what amount of payroll taxes were being withheld from your pay and put that money into a separate account so if the government comes to collect the taxes in a few months you will have the money available to pay them. If the deferred taxes are withheld next year and you have a smaller paycheck than usual, the money you set aside in the account may be necessary to cover the lost pay. In the event the taxes are eventually forgiven, then you will have an unexpected windfall at your disposal.
Federal employees should check with their agency’s payroll office for details on their situation with respect to the payroll tax deferral.