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Opt-out choice urged for federal & military employees subject to payroll tax deferral

Federal-office-building-in-california
Millions of U.S. government employees in federal buildings across the country, like this one Sacramento, California, are being forced to participate in the Trump Administration's partial payroll tax deferral.

House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin are continuing their efforts to cobble together a second round of COVID-19 stimulus payments.

Some people, however, don't want the ostensible financial relief they're already getting.

They are among the federal workers and military members who've had the Social Security portion of their Federal Insurance Contributions Act (FICA) payroll taxes automatically suspended.

Forty-three Representatives say they've heard from these constituents who are unhappy with this paycheck move. And they've written to Mnuchin, asking for amended Treasury guidance that would give federal employees and military members a choice over whether they want to participate in the payroll tax deferral.

It's the second such letter from Congress to Treasury objecting to the payroll tax plan and its effects on federal workers. The first one went to Treasury on Sept. 8 in conjunction with legislation to overturn the payroll tax deferral executive action.

No free paycheck tax break: Just as there generally isn't any free lunch, there often is no free tax break either.

That's the case with the payroll tax deferral, which was created by the Trump Administration to goose an economy slowed by coronavirus precautions, both by businesses and individuals.

The thinking when Donald J. Trump issued the payroll tax deferral executive memo on Aug. 8 was that the temporary halt of payroll tax collection would encourage people to return to workplaces. Then, once they started getting the de facto raise, they would spend the added pay to boost the COVID-hobbled economy.

Federal offices halted workers' withholding of the Social Security tax amount in September. So did the military branches. Those more than 4 million affected workers, have been getting more money, the 6.2 percent of their earnings that usually would be withheld as their payment to the federal retirement trust fund each pay period.

Full FICA Accounting

The 6.2 percent Social Security tax is paid equally each payday by employers and employees. There is a limit, adjusted annually for inflation, on the amount of income subject to the Social Security portion. For 2020, this so-called wage base limit is $137,700. Any earnings over that are not subject to Social Security withholding. 

The other FICA component that is withheld is the 1.45 percent Medicare portion. Again, this payment is made equally by workers and employers, so that 2.9 percent total goes toward the federal health program for senior citizens every pay period. There is no income cap on the Medicare tax. All money made by a worker is subject to this tax.

Overall, 15.3 percent of most workers' earnings, paid equally by employers and employees, go into the federal retiree and medical funds each pay period.


But under the White House payroll tax memo, workers get the 6.2 percent temporary tax break also face the highly likely prospect of having to pay that money back over months of paychecks in early 2021. That's because the withholding tax break through the end of 2020 is just a deferral, not a fully-forgiven payroll tax holiday.

That repayment requirement is why, much to the Trump Administration's dismay, most private companies have not followed the federal agencies' paycheck withholding lead.

The companies are still using their usual paycheck processes, taking full FICA payments from workers. The employers fear, per Treasury guidance on how to handle the payroll deferral, that if they don't collect the payroll taxes, they will be on the hook for the repayment from company funds next year.

No choice for workers: While private sector employers got the option to decide whether to participate, federal agencies didn't. They were told by Treasury to stop the withholding.

That forced these government workers to become payroll tax deferral guinea pigs.

Payroll-tax-paystub

True, extra money is nice. But it's not when it's essentially a forced loan that probably will have to be repaid.

Only Congress can change the law to waive the repayment of the Social Security withholdings and replace the retirement plan's lost funding from other sources. Right now, there's no appetite to do that.

So the bipartisan group of Representatives, 39 Democrats and four Republicans, are asking Mnuchin to give federal workers the same payroll tax deferral choice that private sector employees have.

"Feedback from civil servants and service members we represent indicates that the withholding of payroll taxes has been chaotic and confusing for many of those affected," says the latest letter, which was initiated by Virginia Democrat Rep. Don Beyer.

"There is widespread concern among the ranks of both groups that deferred payroll taxes will lead to increased tax bills in January and potentially even fees for those who are unable to repay deferred taxes," continued Beyer and his fellow Representatives.

Unfair targets: In addition, notes the letter, federal workers and military personnel have told their members of Congress that they feel unfairly singled out for mandatory payroll tax deferral.

Private companies and organizations were given the flexibility not to participate in the program. The U.S. Postal Service, which is not a federal agency, also has opted out of the payroll tax deferral.

The letter cites Mnuchin's own testimony in seeking the same option for federal and military workers.

"Presented with this contrast in a recent hearing, you responded that it would be “a reasonable issue” to allow federal employees and military service members the same flexibility that the Administration granted to the private sector.  We applaud this sentiment, and ask that you put it into practice forthwith," wrote Beyer and his colleagues.

If you're a federal worker or member of the armed forces, are you happy or upset with the payroll tax change to your checks? Are you making arrangements to repay the deferred taxes next year?

And if you're a private sector worker who's still seeing full FICA notations on your paycheck stubs, do you wish your boss would give you a temporary tax-deferral raise?

You also might find these items of interest:

 

Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.

But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.

 

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