Troops, DoD Civilians Won't Be Able to Opt Out of Payroll Tax Deferral Plan

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Soldiers at the National Training Center in Fort Irwin, California
Soldiers assigned to 1st Armored Brigade Combat Team, 3rd Infantry Division, at Fort Stewart, Georgia, engage simulated enemies during Decisive Action Rotation 20-04 at the National Training Center at Fort Irwin, California, on Feb. 13, 2020. Service members and DoD civilians do not have the option to opt out of the controversial payroll tax deferral plan. (U.S. Army photo by Spc. Brooke Davis)

The Trump administration's controversial payroll tax deferral plan will be mandatory for military members and Defense Department civilians, officials announced over the weekend, although businesses can choose whether to participate.

The result will be that, starting with the September mid-month pay period through the end of the year, most service members will see paychecks increase by about 6.2%, but will have to pay back all of that money through larger withholdings from Jan. 1 through April 2021. Late payments will be subject to penalties, yet to be named. Military retirees will not be affected.

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A pay chart circulating in the Army gave examples of how much more in total pay service members who qualify for the deferral could expect to receive from the start of the deferral period through the end of the year.

For an E-2, it was $481.74; for an E-7, it was $772.35. For an O-1, it was $815.20, and for an O-6, it was $1,718.94.

"Effective for the September mid-month pay, DFAS will temporarily defer the withholding of your 6.2% Social Security tax if your monthly rate of basic pay is less than $8,666.66," the Defense Finance and Accounting Service said in guidance for service members issued Sept. 4.

"If your monthly rate of basic pay is at or above this threshold, your Social Security tax withholding will not be affected by the temporary deferral," it added.

Service members and DoD civilians "are not eligible to opt-out of the deferral if their Social Security wages fall within the stated limits. The deferral will happen automatically."

In addition, "collection of the deferred taxes will be taken from your wages between January 1 and April 30, 2021, for both military members and civilian employees," it said.

The DFAS guidance followed mixed signals from the White House about whether service members could opt out.

In a similar announcement the Internal Revenue Service stated that the deferral plan is mandatory for the entire federal workforce, without the opportunity to opt out that is afforded to private employers, who have shown a marked lack of enthusiasm for the program.

The Coast Guard was the first service to give members and civilian employees public notice of mandatory changes under the deferral plan.

In a memo, Coast Guard Commandant Adm. Karl Schultz said that the deferral plan is "non-negotiable, there is no opting out of the deferral" for Coasties or civilians.

The deferral "applies to all civilians at or below $4,000 per pay period" and "to all military members at or below $8,666 of basic pay only per month," he said.

The deferral plan has caused confusion, particularly in the business sector, over how it will work, and House Democrats have mounted efforts on two fronts to block it.

On Friday, Rep. John Larson, D-Conn., chairman of the House Ways and Means subcommittee on Social Security, introduced a bill to block the IRS directives on plan implementation.

Larson and other Democrats also called for a Government Accountability Office report on whether the IRS guidance complies with congressional rules. Senate Minority Leader Chuck Schumer, D-N.Y., made a similar request to the GAO last Wednesday.

The White House and Republicans have argued that the deferral plan will boost an economy hit hard by the COVID-19 pandemic, while Democrats charge that it is an election-year ploy to give workers the illusion of a pay raise while downplaying that they will be hit with pay cuts starting Jan. 1.

"Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year," the U.S. Chamber of Commerce and more than 30 trade associations wrote in an Aug. 18 letter to Congress and the Treasury Department.

"It would also be unworkable to implement a system where employees make this decision," the groups said, adding that many of their members would likely decline to participate.

FedEx is the latest employer to announce that it will not be participating in the deferral plan.

"FedEx plans to continue withholding and remitting employees' share of Social Security taxes at least until more complete guidance is released by the Internal Revenue Service and Treasury Department," the company said in a Sept. 2 statement.

The subject began with an Aug. 8 executive order from President Donald Trump to the Treasury Department on "deferring payroll tax obligations in light of the ongoing COVID-19 disaster."

In the order, Trump said, "It is clear that further temporary relief is necessary to support working Americans during these challenging times. ... This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most."

The tax, which goes to support Social Security and Medicare trust funds, currently amounts to 15.3% -- half paid by the employer and half by the employee.

For employees, 7.65% of wages are withheld from each paycheck -- 6.2% for Social Security and 1.45% for Medicare.

Rep. Don Beyer, D-Va., has charged that the deferral plan will result in a 12% cut in pay for the military, federal workers and private employees after Jan. 1, as standard tax withholding resumes and deferred taxes come due on top of that.

"Nearly a month after the President's memorandum on deferring payroll tax obligations, the administration's conflicting and changing statements have left employers and employees confused," Beyer and 17 other Democrats on the Ways and Means Committee wrote in a Sept. 2 letter to the White House. "What steps are you taking or advising other agencies to take to inform federal workers of their lower take-home pay in 2021?"

The rollout of the deferral plan has also caused confusion in the federal workforce and the unions that represent them.

In a letter last Thursday to Russell Vought, director of the Office of Management and Budget, Everett Kelley, national president of the American Federation of Government Employees, which represents most workers at the Department of Veterans Affairs, asked that federal employees have the ability to opt out.

"While some federal employees may wish to defer their payroll tax obligations, many others do not," he said. "I have heard from many of our members. Most have been unaware that they would be required to re-pay the taxes starting in January 2021 and, when they learn this, they are strongly opposed to having their tax deferred involuntarily."

However, emails sent Tuesday to employees of the Defense Contracting Management Agency and obtained by Military.com appeared to rule out options for federal workers.

Under the deferral plan, "Essentially, employees will see a temporary increase in their take home paychecks, but will see smaller paychecks in early 2021," the emails said. "There is no opt-out or opt-in option" for federal employees on the deferrals.

-- Richard Sisk can be reached at Richard.Sisk@Military.com.

Related: 4 Ways to Stop the Payroll Tax Cut from Lowering Your 2021 Paycheck

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