As you’ve probably heard, there is a really unusual change happening with our payroll tax withholding for the next few months, and it has created a TON of questions. And when you have questions, I have answers! So, first I’m going to explain what’s happening, and then I’ll answer the questions I’ve received. And you can add your questions in the comments, and I’ll answer them, too.
What Is Happening?
President Trump has issued a memorandum instructing employers to stop withholding Social Security taxes from the paychecks of most workers. While many civilian employers are choosing not to follow this instruction, the federal government will be following this instruction. This means that military service members will not have Social Security taxes withheld from their paycheck from September through December of 2020.
BUT, the President’s memorandum doesn’t state that the taxes are being eliminated because that’s not within his powers.
So, unless there is Congressional action or someone finds some other loophole, these taxes will need to be paid at some point in the future. The IRS guidance states that the delayed taxes will be withheld from January 1, 2021 to April 30, 2021, on top of the regular payroll taxes due for earnings during that period. Unless Congress passes something to waive these taxes, this isn’t a pass on these taxes – you will probably need to pay them eventually.
Update: The repayment will occur over the full 2021 calendar year, January through December.
When Does This Happen?
The memorandum specifies September 2020 through 31 December 2020. Most military members receive a mid-month deposit of a portion of their monthly pay, and the mid-month payday for September is Tuesday, 15 September 2020. So for most military members, Tuesday’s payday will be the first paycheck that doesn’t have payroll taxes withheld. Without those taxes withheld, your paycheck will be larger. (A huge number of military members receive their military pay prior to the actual payday, and therefore their pay will be in their account between Friday, 11 September and Monday, 14 September.)
What Are Payroll Taxes?
Payroll taxes are the taxes that fund Social Security and Medicare. They have absolutely nothing to do with your regular income taxes. If you look on your LES, you’ll see them here:
But this change only applies to the Social Security portion of payroll taxes. The employee’s portion of regular Social Security taxes is 6.2% of taxable income. When the memorandum was first announced, many people, including me, thought that it applies to both Medicare and Social Security taxes, but after further investigation, it is just Social Security.
Side note for those who like to understand things a little bit more: The total amount of payroll taxes that are usually withheld 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.)
Who Does This Affect?
This applies if you make less than $104,000 a year in taxable income, or $8,666 per month. That’s generally anyone with a pay grade below W-5 or O-5.
What Pays and Allowances Are Covered?
Trick question. Just basic pay.
Why is that, you ask? Because many special pays are taxable, so should they be subject to this?
Great question, and surprising answer! There are over 30 special pays that are taxable, but they are not subject to Social Security tax withholding. (And I just learned that TODAY!) Hat tip to Jerry Zeigler of Better Financial Counseling Network for finding the actual source on this.
Side note: In general, anything called a Pay is taxable and anything called an Allowance is non-taxable, except CONUS COLA. Despite being an allowance, it is taxable.
Do I Need To Do Anything?
On one hand, you don’t need to do anything. The responsibility for this lies on the employers or their payroll organization. For military members, that’s the Defense Finance and Accounting Service (DFAS) or the Coast Guard Pay & Personnel Center.
On the other hand, you should probably put those taxes aside because, as it stands now they need to be repaid in 2021. Because, as I said, there is not yet any provision to make those taxes go away, simply to defer collection.
Check your August Leave and Earnings Statement and see how much of that paycheck was withheld was for Social Security. Find a way to put that money aside, either by using a savings account that isn’t being used, or opening a new account, or whatever you need to do. If that means taking that cash out of the bank and putting it in an envelope under your mattress, do it. If the taxes eventually are eliminated/forgiven/washed away, then you’ll have a nice little chunk of change to beef up your emergency fund, pay off debt, or enjoy a treat. If the taxes do come out in the future, you’ll have money to make up the difference in your paycheck.
What If I’m Deployed?
Even though income earned in Combat Zone Tax Exempt areas is exempt from federal taxes, it isn’t exempt from payroll taxes. So deployed folks will also see a change to their pay, and will still (presumably) need to repay these taxes next year.
Does This Affect Retirees?
Military retirement pay is not considered earned income, and does not have Social Security and Medicare taxes withheld. So your military retirement income should not be impacted. However, if you have another job, this may impact that income depending on how your company/organization is handling it.
What Happens If I Leave The Military Between Now and April?
Good question. The IRS has stated that employers “may make arrangements to otherwise collect the total Applicable Taxes from the employee.” But they don’t say HOW. My guess is that it will come out of the final paycheck, but that’s simply a guess.
What If The Military Isn’t Your Only Income?
First, let’s be clear about individual income vs. family income. The $104,000 limit applies to individual income, not family income. But if your combined personal income exceeds the $104,000 annual limit, you should definitely keep this money aside. You may need to make a repayment even other workers have those taxes wiped out.
The limit is per person, so you don’t have to worry about spouses who make more than $104,000 per year together.
Can I Opt-Out Of The Deferral?
Many civilian employers are continuing to withhold payroll taxes, or giving their employees the option to opt-out of the change. Unfortunately, that’s not an option for military service members. DFAS will make this change,and your paycheck will be bigger.
How Will This Impact My Tax Return Next Year?
Because this is about a payroll tax, and not an income tax, there should be no impact on your income tax returns next year.
Note that I said “should.” As we know, strange things can happen. But it seems very unlikely that this will end up being part of the federal income tax returns.
Should I Change My Withholding To Balance This Out?
Probably not. Income taxes and payroll taxes live in different buckets, so changing your federal income tax withholding will not have any impact on this payroll tax change. The withholding that you direct through your W-4 Employee’s Withholding Certificate is for your federal income taxes.
For most people (employees who are paid by an employer and reported on a W-2), payroll taxes are paid via the employer. (Self-employed people are different, but not what we’re talking about in this article.) You don’t get to give instructions for your payroll taxes.
You can read the DFAS announcement here, but it doesn’t really say much.
Please let me know what other questions you have, and I’ll try to find answers!
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Hi!! Okay so my husband will be EASing this fall. His separation date is December 5th. We are unsure if his next employer is or is not participating. If they are, but his pay changes, will the taxes being paid back next year be based on his pay with the new company or his current military pay? If they do not participate, will we just be pocketing the withheld taxes now? Hopefully that makes sense. Please help! I don’t know where to look for answers.
Hi Hannah!
Unfortunately, those are answers that we don’t have yet! The IRS has not given any guidance on how employers are to recoup these missing taxes from people who leave the company before April of next year. I wish I could help but we just don’t know yet 🙁
Thank you, Kate! Wonderfully written.
Awesome job Kate!!! Keep up the great job!!!
How would the payroll taxes be repaid if not when doing your taxes next April? I’m not sure that adjusting withholdings on the W-4 doesn’t off balance the change. Could you explain the mechanics of why that wouldn’t have the desired effect?
Per the IRS guidance linked in the article, the deferred taxes will be paid via payroll deduction from January through April of 2021 – basically twice the regular rate.
Increasing your W-4 withholdings wouldn’t have the desired effect for most people (anyone paid as an employee and reported on a W-2 because W-4 withholdings are for income taxes. Employees pay payroll taxes through their employer. They’re two different buckets of money. It’s the same as if you withhold too much federal taxes, that doesn’t help your state tax bill.
Does that make sense?
It does. Also, I missed it but DFAS did release a plan last night that explains the plan at this link. https://www.dfas.mil/taxes/Social-Security-Deferral/#:~:text=Social%20Security%20Payroll%20Tax%20Deferral&text=This%20change%20is%20effective%20through,pay%20is%20less%20than%20%248%2C666.66
THANK YOU VERY VERY MUCH !!!😀😀😀
Hi, if military members receive an automatic increase in pay January 1, would the repayment be higher than the deferral? One issue with the private sector payroll systems is that if I just force SS to withhold 0% from September – December and then 12.4% January – April, the repayment could withhold on a higher base pay than the deferral calculated. This is one reason my employer is opting out for now because there have been no changes to the payroll system… I hope/assume for military, they have taken this into consideration? Otherwise, this is hurting the military families by allowing a deferral of 6.2% on their 2020 base pay but withholding 12.4% on their 2021 pay.
I think this a legitimate concern, but one of my higher-level CPA readers insists that it’s not. She says that the employers will track dollar for dollar tax deferrals and then recoup that deferral dollar-for-dollar in the spring.
I fear we will have to wait and see.
I know it CAN be done properly, but I’m not confident that it WILL be done properly.
Hi! So I’m currently deployed in a combat zone. I’m a reservist and in the civilian side of things I work for a railroad. Most people aren’t familiar with this but I am under what’s called railroad retirement. It’s a tier system and we don’t actually pay social security taxes. I put no money into social security and get taxed at a higher rate than social security for my retirement. Does this mean I should not be paying social security taxes while activated for this deployment?
Cooper, your different employment falls under different rules. Your military work does contribute to Social Security – that’s a good thing. It may help you avoid the Windfall Elimination Provision. Definitely learn up on this if you will work for the railroad for a long time. It’s a big deal. https://socialsecurityintelligence.com/the-windfall-elimination-provision/
Kate, will this impact retirees?
Thanks,
J Riner
Hi Jim,
As Social Security taxes are not taken out of retirement pay, this change will not impact military retirement pay. It could impact any other employment that retirees have.
Hi Kate, what I did was filed a 1040ES for the quarter to make sure my taxes were paid regardless and will also do the same thing next quarter. I recommend those who are financially able to do so pay their taxes so they won’t get hit with reduced pay in 2021 when they have to pay those deferred taxes back, it’s our money and this loan is Not free.
Jeffrey, unless there is a change to the way the IRS has said that they are going to handle this, changing your income tax withholding will not impact your Social Security tax situation. Two different buckets of taxes. I don’t think there is a way on your 1040ES to allocate that to payroll taxes??
Unless, of course, you are self-employed, in which case you’d be doing that anyway.
I think I’m missing something in how this is going to work for you?
Great article to keep military families well-informed about this evolving situation. Thank you Kate for being the voice of reason and factual information.
Okay, so here we are at tax filing time, and things don’t seem to be working out too well…
My W-2 reflects an underpayment of FICA-Social Security taxes due to this deferral. In other words, my total amount of SS taxes for the year are not the expected 6.2% on my W-2. My W-2 just shows what was actually withheld in tax year 2020. So the H&R block tax program flagged that and warned my that my numbers were off, and because of this, it’s showing that I OWE about $2000 this year. I’ve been in the military for a while, and I’ve NEVER had to pay–always get a refund (my finances are quite simple). This doesn’t seem right to me. We’re still going to pay those 2020 taxes back, so if I have to pay when I file my taxes, it seems that I’m paying twice! So I guess my question is, should our W-2’s reflect the full amount of SS taxes owed this year, or just what was withheld? Becuase like I said, if it’s the latter, my tax program indicates that I’m essentially paying those taxes twice–once at filing, and again each month of 2021 as we pay back the deferred amount. What am I missing here?
Adam, unless you are in a very unique situation, the uncollected Social Security taxes are not the reason why you owe this year. The average taxpayer doesn’t use the Social Security withholding in their income tax calculations. Now, if you were self-employed or had multiple jobs that pushed your income over $137,700 in 2020, then Social Security taxes do come into play.
In almost all cases, you can click through the warning that your Social Security figures are off, and continue as usual.
If you’re unsure why you owe, there are many resources for military service members to get help with their taxes, including the Volunteer Income Tax assistance programs on base and the Military OneSource MilTax program. If you’re just trying to understand what’s already been calculated, the Personal Financial educator at the Fleet and Family Service center should be able to help you. Or heck, send it to me and I’ll let you know what I see.
Rest assured, it is very, very unlikely that the Social Security tax deferral is impacting your tax return. I know it is confusing if you don’t deal with this stuff all the time, so feel free to ask more questions!
Ah, thank you, that makes sense! After posting here, I found elsewhere where it mentioned that SS taxes don’t figure into the federal tax burden, at least not for me at my income levels. Still not sure why I’ve gone from getting a modest refund every year to all of a sudden owing $2K, when our finances haven’t changed much this year from last year. A very modest increase in salary (that ~2% mil pay raise in January), and about $800 less student loan interest paid this year…doesn’t make sense.
Anyways, I’ll take your advice and head to the local VITA office on base.
Thank you!