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While private companies are deciding how to proceed with the payroll tax exemption, one major employer has decided it’s in: the federal government.
President Donald Trump’s payroll tax deferral, which he issued by executive order, went into effect September 1.
This is a temporary suspension of the 6.2% tax that employees pay to Social Security, effective until the end of the year, and it applies to people who do not earn more $4,000 per bi-weekly pay period.
The key issue is that this is just a deferral of the tax — not an outright pardon, which would require congressional legislation.
This means participating employees would get a 6.2% increase in their take home pay for the rest of the year, but the deferred tax will be clawed back from their paychecks – along with the ongoing payroll levy. known as FICA taxes – in the first months of 2021.
“When FICA is postponed, they typically get 6.2% more now, then 12.4% less from January through April,” said Anne Bushman, partner, Washington National Tax Compensation and Benefits at RSM US.
Although private employers are expected to be largely lukewarm about the tax exemption, due to its rapid rollout and the difficulty of explaining lower wages to workers over the new year, the federal government – including enlisted servicemen — will participate with no way to fall outside.
“Military members are not eligible to opt out of the deferral if their Social Security salaries are within the stated limits,” the Defense Finance and Accounting Service said. on its website. The entity provides payroll services for the Department of Defense.
Senator Chris Van Hollen, D-Md.
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Lawmakers are now pushing the federal government to allow their employees to choose whether they want to participate.
“We urge you to let federal workers and uniformed service members choose to defer their payroll tax obligations under Tax Notice 2020-65rather than forcing them to participate,” Sen. Chris Van Hollen, D-Md., wrote in a Letter of September 8 Treasury Secretary Steven Mnuchin and Office of Management and Budget Director Russell Vought.
“While some federal employees may want to defer paying their payroll taxes, unions representing federal workers have made it clear that many others do not,” he wrote.
Other efforts are also underway to block Trump’s executive order.
Rep. John Larson, D-Conn., recently introduced a bill to reverse Trump’s payroll tax deferral. This comes on the heels of pressure from Senate Democrats for a Congressional Expedited Review Act ruling on the tax exemption – a step towards the cancellation of the suspension.
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Whether you’re a federal employee who’s locked into deferral or you’re in a private company listing an entire workforce for tax exemption, you’ll need to budget now to avoid a cash crunch in 2021.
“People who recognize that this may be a problem for them next year may want to set aside the extra funds they are getting right now in a high yield savings account recognizing that their salary is going to be lower for the first four months of next year,” said Eric Bronnenkant, CPA and chief tax officer at Betterment.
It also means that you need to be aware of how your expenses might stack up next year, as they might fluctuate.
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“Changes that may occur between now and April may include benefit changes for 2021, vacation fees, additional childcare costs if schools do not reopen and potentially others,” Bushman said of US RSM.
“If employees plan only for spending today, and not spending through April, their planning won’t be good enough,” she said.
What remains more unclear for federal and private workers is what could happen if they part ways with their employers before 2021.
Military or civilian federal employees who separate from their employer or retire before taxes are reclaimed are still responsible for paying taxes, according to the Defense Finance and Accounting Service.
Private employers can make arrangements with their employees to collect taxes, depending on a notice from the IRS. However, companies are subject to penalties, interest and tax surcharges if they do not pay deferred taxes by April 30.
“Employers have some flexibility to collect deferred tax amounts from employees other than proportionally from January through April, if needed,” Bushman said.
“Granted, leaving a job is sometimes voluntary and sometimes not, but in any case, employees should be aware that it could happen and that it could affect their final salary or otherwise.”