What Does the President's Payroll Tax Announcement Mean for Military?

FacebookTwitterPinterestEmailShare

Last week, President Donald Trump issued a memorandum that would defer the payment of payroll taxes for most military members, effective Sept. 1, 2020, through Dec. 31, 2020.

The memo applies if you make less than $104,000 a year in taxable income, which is generally anyone with a paygrade below W-5 or O-5 -- but could leave you owing money out of your paycheck later. Here's what you need to know.

What Are Payroll Taxes?

Payroll taxes fund Social Security and Medicare.

The total amount of payroll taxes is 15.3% of taxable income, up to an income limit. If you work for an employer (versus being self-employed), your employer pays half and you pay half. So, for a regular, W-2 employee, 7.65% of your wages are withheld each check (6.2% for Social Security and 1.45% for Medicare.)

You see them listed on your Leave and Earnings Statement in the deductions section. The Marine Corps' LES reads "Social Security" and "Medicare;" other LESs say "FICA-SOC SECURITY" and "FICA-MEDICARE.”

What Does the President's Executive Order Say?

The Executive Order related to payroll taxes is aimed at creating financial relief for those impacted by the pandemic after Congress left for its summer recess without passing its own version. Issued Aug. 8, 2020, it states:

"I am directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need. 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."

You can read the full text of the memorandum to understand more.

What Does This Mean for You?

It's hard to guess exactly how this is going to unfold. It's possible that the memorandum could be challenged, either by Congress or through the courts because of its impact to Social Security funding. It's also possible that the Defense Finance and Accounting Service won't be able to do whatever needs to be done before the Sept. 1, 2020, deadline. There is even speculation that some employers may continue withholding payroll taxes, even though they don't have to remit them during the deferral period, so that they won't have to withhold more when this deferral expires.

However, if the memorandum remains as written -- and DFAS chooses to and is able to change its program -- there may be no payroll taxes withheld from your pay for September, October, November and December.

What if the Military Isn't Your Only Income?

The $104,000 yearly limit may prove tricky for employees who work at multiple jobs, or those who have a small business in addition to their regular employment. The memorandum did not provide any guidance on how that would work, simply stating, "The Secretary of the Treasury shall issue guidance to implement this memorandum."

If you work a job outside of the military, or you are a civilian working multiple jobs, keep an eye out for more guidance on how the income limit will be handled.

What Do You Need to Do?

At this time, there is nothing for you to do. If the payroll tax deferral does happen, any change will be handled for you by DFAS, and your paycheck will be slightly larger due to the taxes that aren't withheld.

If that happens, you'd be wise to take that money and put it aside into a savings account in case you need to repay it in the future. We'll keep you updated when and if there are any changes to this situation.

Get the Latest Financial Tips

Whether you're trying to balance your budget, build up your credit, select a good life insurance program or are gearing up for a home purchase, Military.com has you covered. Subscribe to Military.com and get the latest military benefit updates and tips delivered straight to your inbox.

Show Full Article

Related Topics

Personal Finance