Senators push to make payroll tax deferral optional for feds, service members

A group of U.S. senators, including one Republican, is asking the administration to alter its plans for a mandatory payroll tax deferral for federal employees and service members that could result in unwanted tax consequences in the future.

President Donald Trump signed an executive order in August permitting employers to temporarily stop withholding employee shares of social security taxes on paychecks through the end of 2020, with an eye to getting more money into the hands of cash-strapped workers to ameliorate some of the effects of the economic crisis and pandemic. However, that money would still be owed in 2021.

Most large corporations took a pass on the deal, but Trump ordered the federal government to put it in place for federal employees and service members making less than $104,000 a year.

In a Sept. 8 letter, Sen. Chris Van Hollen (D-Md.) urged the administration to answer questions about how the government intends to recoup the advanced funds, especially from individuals who separate from government service before paying the back taxes. Additionally, Van Hollen wants a cost estimate of funds that could be lost under the scheme and more information on how agencies and the military plan to communicate details of the tax deferral to employees.

The lawmakers also want to make participation optional.

"Federal workers and service members should not be used as pawns for a payroll tax scheme that many private sector employers are unlikely to join and where key questions remain unanswered," the letter states.

Sen. Susan Collins (R-Maine), whose state is home to thousands of Navy Department jobs, joined more than 20 Democrats in the letter.

Unions representing federal employees have come out against the plan.

"The [social security] tax deferral scheme has the makings of a fiasco for employees, employers and the IRS," Everett Kelley, national president of the American Federation of Government Employees, stated in a Sept. 3 letter to Office of Management and Budget Director Russell Vought. "Federal workers will save nothing in taxes, and in the worst case, may even be subject to penalty payments and interest."

A memo from the Defense Finance and Accounting Service explained that the deferral was mandatory for service members and civilian defense employees earning below the stated limits of the plan. For members of the uniformed military, the extra cash will show up in September's mid-month paycheck. For civilians, the deferral kicks in for the pay period ending Sept. 12.

The DOD plans to recoup deferred taxes from employees by April 30 of next year, and states that civilian employees and service members who separate before paying back deferred taxes will still owe the money. "Additional information on the collection process will be provided in the future," the memo states.

Individuals contribute 6.2% of their salaries to social security, which is matched by employers. The first $137,000 of a taxpayer's income is subject to social security tax.