Payroll Tax Deferral Program Leaves Federal Employees Seeking Answers

The White House recently announced an executive order that authorizes employers to defer the Social Security payroll tax from September 1, 2020 through the end of the year for employees who make less than $3,999 per biweekly pay period, known as a payroll tax deferral. This new order has left many agencies and employees with various questions like whether employees can opt-in or out of the program and what happens to federal employees who leave their agencies before or during the window of repayment.

Under this program, federal employee Social Security taxes would be withheld for the rest of the year. Employees would pay back the deferred taxes in January 2021. This means that initially, paychecks will be larger, but in the beginning of 2021 employee paychecks will be smaller than usual.

There are several questions surrounding the implementation of this new program, including what will happen to the thousands of recently hired US Census Bureau workers who are in temporary positions and will likely have different jobs next year.

A September 2, 2020 letter from the National Treasury Employees Union (NTEU) National President Anthony Reardon to the Office of Management and Budget (OMB) Director Russell Vought details a long list of questions that must be answered about the payroll tax deferral to gain more clarity. These questions include:

• Are there opportunities for any federal agency or federal employee to opt out of the deferral?

• How will the deferred taxes be paid back? Should employees be prepared to have extra taxes taken out of several paychecks in early 2021 or taken out in one lump sum? Will employees be able to choose how and over what period of time they can pay it back?

• Should an employee get a raise in early 2021, are the payroll processors prepared to make the 6.2 percent calculations on differing amounts (previous wage versus new wage)?

• What happens if a federal employee retires or leaves the federal service during either the deferral or during the window for repayment?

• What options are there for employees who may have trouble paying back the deferred taxes?

The letter continues to explain that collaboration between OPM, the IRS, and the administration is necessary in retrieving answers to these questions and developing a more cohesive plan.

One major agency, the Defense Contracting Management Agency, has told its employees by email that employees will not be able to choose whether to opt-in or out of the program. Federal News Network quoted the email stating that, “No payroll providers, departments/agencies, nor employees will be able to opt-in/opt-out of the deferral. The Office of Management and Budget and the Office of Personnel Management [and] the Defense Finance and Accounting Service will implement the guidance according to the expectation that all federal civilian payroll providers will act in unison.”

Larry Cosme, President of the Federal Law Enforcement Officers Association (FLEOA) expressed his concerns with the new policy on behalf of law enforcement in a press release stating, “Our concern lies in the unanticipated tax implications for federal law enforcement officers that may occur in 2021 which may include up to an additional 12% tax burden.  As it now stands, this directive would provide short term relief but a long term negative financial impact on our members.”

Active duty military members are not exempt from this payroll tax deferral, according to Federal News Network. The U.S. Coast Guard, in a message on September 4, 2020, was the first military branch that informed its employees that this tax deferral was non-negotiable and they could not opt-out. Like with many other agencies, the details in the message relating to the program itself were vague.

Members of Congress also expressed concern about the lack of clarity in the executive order.

Representative Don Beyer (D-VA) led Democrats on the House Ways and Means Committee in seeking more clarity. In a letter to Agriculture Secretary Sonny Perdue, Treasury Secretary Steven Mnuchin, and Acting OPM Director Michael Rigas, the lawmakers expressed dismay over the administration’s confusion and conflicting answers to questions regarding the payroll tax deferral.

The lawmakers explain, “We are especially alarmed that after many businesses and groups, including the U.S. Chamber of Commerce, have expressed concern about the ramifications of deferral for employers and employees, federal public servants are being used as guinea pigs.”

Senator Chris Van Hollen (D-MD) and twenty-two other members of Congress also sent a letter to Treasury Secretary Mnuchin and Director Vought of OMB requesting that they allow federal employees to be given an opt-in/opt-out option of the payroll tax deferral program.

The lawmakers said, “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.”

The IRS has answered questions about the payroll tax deferral program on their website. FEDagent will continue reporting on this issue as more information becomes available.