Military Impact of Payroll Tax Deferral
Payroll Tax Deferral Impact on The Military
President Trump signed a memo last month directing the Treasury Department to allow employers to defer payment of employee-side Social Security payroll taxes, to provide relief to workers during the coronavirus pandemic. Under IRS guidance implementing the order, employers can cease withholding the 6.2% Social Security tax from Sept. 1 through Dec. 31 for workers who make less than $4,000 biweekly, and then recoup the money by increasing the amount withheld from workers’ paychecks in the first few months of next year.
As a result of this, many concerns and questions have been on the forefront of Service Member’s minds. Below are some frequently asked questions and answers associated with this deferral implementation.
Why are my Social Security taxes being deferred?
In order to provide relief during the COVID-19 pandemic, a Presidential Memorandum was issued on August 8, 2020, and guidance followed by Internal Revenue Service on August 28, 2020, to temporarily defer service members Social Security (Old Age, Survivors, and Disability Insurance (OASDI)), as seen on the Army, Air Force, and Navy Service Members Leave and Earnings Statement as “FICA-SOC SECURITY”) tax withholdings. The Social Security tax is labeled as “Social Security” on the LES for the Marine Corps.
What is the Social Security tax?
Social Security tax is also called the Old Age, Survivors, and Disability Insurance (OASDI) tax and is required by law. The tax funds the Social Security program, which is administered by the Social Security Administration.
Can I opt-out of the deferred Social Security tax withholding?
Military members will be subject to President Trump’s payroll tax deferral and will not be able to opt out of it, the payroll services provider for the Department of Defense said over the weekend.
“Military members are not eligible to opt-out of the deferral if their Social Security wages fall within the stated limits,” the Defense Finance and Accounting Service (DFAS) said on its website. “The deferral will happen automatically.”
Does this affect any of my other tax withholdings?
No. Pursuant to the Department of Treasury and the Internal Revenue Service Guidance, this only affects your Social Security tax withholdings, which will be deferred from September 2020 through the end of the calendar year 2020.
Department of Treasury and the Internal Revenue Service guidance link:
What is the wage limit amount for determining who will have their Social Security tax withholdings deferred through the end of calendar year 2020?
If your monthly rate of basic pay is less than $8,666.66, your Social Security taxes will be deferred. If your monthly rate of basic pay is at or above the threshold, your social security tax withholding will not be affected by this temporary deferral. The monthly rate of $8,666.66 is determined as: The IRS rate of $4,000 is based on a bi-weekly pay schedule (26 pay periods), while your military pay is calculated on a monthly pay schedule (12 months). To convert the bi-weekly rate of $4,000 to monthly, multiply $4,000 X 26 (pay periods) = $104,000 and divide by 12 (months), which will equal $8,666.66 for the monthly rate.
What grades are impacted?
Enlisted service members will have their Social Security taxes deferred. Officers at the grade O1-O4, the grade of O5 with less than 16 years of service, and the grade of O6 with less than 14 years of service will have their Social Security taxes deferred. All officers at the grade of 05 with 16 or more years of service, grade of O6 with 14 or more years of service, and all O7s through O10s will not have their Social Security taxes deferred. All warrant officers will have their Social Security taxes deferred except those at a grade of W5 with 24 or more years of service.
Will I be required to pay back the Social Security taxes that are deferred?
Yes. Current IRS guidance indicates the payment of the deferred taxes is postponed until January 1, 2021. The deferred Social Security taxes not withheld from wages during 2020 will be collected from your wages between January 1, 2021, and April 30, 2021. Additional information on the collection process will be provided in the future.
How much will my payroll provider collect during each pay period starting January 1, 2021 through April 30, 2021?
As more information becomes available on the collection of the deferred Social Security taxes, it will be posted here.
Is my military retirement pay impacted by the Social Security tax deferral?
No. Service members pay social security tax on earned income. Since military retirement pay is a pension and not considered earned income, it is not affected by the deferral.
How will the deferral process work for Reserve and National Guard members?
Due to differences in pay systems, application of the tax deferral process will be different for most members of the Reserves and National Guard in the Army, Air Force, or Navy. For these members, if they are eligible for the tax deferral (per the wage threshold), their initial net pay will
not have the Social Security taxes deferred. The deferral will be processed in a separate pay transaction, occurring two to three business days later to refund the Social Security taxes; resulting in an additional Leave and Earnings Statement in MyPay with an entry labeled “FICA Refund” reflecting the refunded Social Security tax amount.
Additional tax relief related to the COVID-19 pandemic can be found on IRS.gov. Service members and families can contact Financial Readiness staff at their installation Military and Family Support Center, or Military OneSource at 1-800-342-9647, if they need assistance in reviewing their Leave and Earnings Statements (LES) or have questions in planning for changes to their net take home pay.
For more information, service members may view the Defense Finance and Accounting Service page, https://www.dfas.mil/taxes/Social-Security-Deferral/ and a list of Frequently Asked Questions, here. As more information is determined, updates will be posted on the site. For more information on financial readiness, visit www.finred.usalearning.gov or www.milspousemoneymission.org.
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About the author
Justin Fisher is a currently serving with the Arkansas Army National Guard. His career has expanded two decades and has three deployments. He holds a Bachelor’s in Arts in Communications and hosts a weekly podcast featuring candid interviews with members of the military.