Military Payroll Tax Deferral Explained

On August 8, 2020, President Donald Trump issued a memorandum allowing the military payroll tax deferral for any employee earning less than $4000 every two weeks. The $4000 limit refers to gross, or pre-tax earnings. It is important to notice the memorandum defers the taxes, it does not eliminate, revoke, or waive these taxes.  In essence, the government could collect any non-paid taxes at a future date.  Right now, the repayment date is scheduled for early 2021.  But before we tackle that issue, let’s cover some of the important information surrounding payroll taxes.

Understand Your Military Payroll Taxes

Payroll taxes, also referred to as FICA (Federal Insurance Contributions Act) pay for Social Security and Medicare. These taxes are listed as FICA Social security and FICA Medicare on military Leave and Earnings Statements (LES) and are also often abbreviated on employee paystubs. FICA taxes are split between the employer and the employee. These taxes are levied at 15.3% of earnings up to $137,700. Read more about the Social Security wage base here. There is no wage base for Medicare taxes. In fact, if you are a high-income household, there is an Additional Medicare Tax rate of .90% to wages, salaries, and tips.  Employees pay 6.2% for Social Security and 1.45% for Medicare, with matching amounts paid by employers. For military service members, Social Security and Medicare taxes are paid on all entitlements earned.

Employers are already eligible to defer payroll taxes under the CARES Act.

The Presidential memorandum defers payroll taxes (just the Social Security portion of 6.2%) from September 1, 2020 through December 31, 2020 for all federal employees. Under the CARES Act employers are already eligible to defer payroll taxes through December 31, 2020. Some self-employed individuals are also eligible to defer their SECA (Self-Employed Contributions Act) taxes. For now, the memorandum does not address employee options for participation if the employer does not choose to participate. There may be further clarifications to come. You can read more about IRS guidance on payroll tax deferral here.

Per the official memorandum, there will be no penalties or interest charges to deferred taxes. The Secretary of the Treasury has been directed to explore options for forgiving the deferred taxes. This means there is a potential that the deferred amounts will not have to be repaid. At this time there is no guarantee that forgiveness of deferred amounts will happen. Deferred taxes owed may have to be repaid in 2021. Currently, deferred taxes must be repaid in full between January 1, 2021 and April 30, 2021. Essentially, your payroll tax deductions would double for the first 4 months of 2021.

Military members have no choice

For civilian employers the program is voluntary. For federal employees, including the military, information published by DFAS indicated that deferral of employee taxes (6.2% of earnings) will not be optional. Currently, there is no way to opt-out of the deferral and no indication that an opt-out option is being considered. For now, federal employees and military service members will see more money in their mid-month pay.  But they may be forced to pay back the increase over the first four months of 2021.

If you are a civilian employee, check with your employer to see if they are participating in the payroll tax deferral. Many are not.  Many employers are concerned about the ramifications of payroll tax deferral.

If you are a military service member or federal employee, there is an easy way to calculate the increase in pay due to the payroll tax deferral. Let’s work through a quick example for a hypothetical September paycheck. The calculation would look like this:

Military Payroll Tax Half-Month Example

Earnings from 9/1-9/15:	$4000.00
Monthly payroll tax 6.2%:	X .062
Taxes deferred:	$248

 

Military Payroll Tax Full Month Example

Earnings from 9/1-9/30:	$8000.00
Monthly payroll tax 6.2%:	X .062
Taxes deferred:	$496

What do you do if you see your calculated increase in pay in your next paycheck? Set the money aside and don’t spend it!
Right now, there is no guarantee of any legislation to forgive the deferred taxes. Repeat for each paycheck through the end of 2021 or until there is more clarification on this issue.

For employees, whether you are civilian, federal, or military, save the payroll taxes for now. If you are military, you have likely experienced being over-paid only to have DFAS reach back months (or years) later with large extra deductions from your paycheck. Consider the payroll deferral like another DFAS error. Save the overpayment. You know they will come for it eventually.