Edward A. Zurndorfer
On August 8, 2020, President Trump issued a Presidential Memorandum directing the Secretary of the Treasury to use his authority pursuant to section 7508A of the Internal Revenue Code to defer the withholding, deposit, and payment of certain payroll tax obligations. Secretary of the Treasury Mnuchin has determined that employers that are required to withhold and pay the employee share the of Social Security (FICA) payroll tax under section 3102(a) of the Internal Revenue Code or the Railroad Retirement Board tax-equivalent under section 3202(a), need not do so. It should be emphasized that a business need not implement this payroll tax “relief”. The tax relief applies to appliable wages and salary paid between September 1, 2020, and December 31, 2020.
As mentioned, it is up to a business or to an employer to decide whether it wants to implement this payroll tax relief. But the Trump Administration has directed that all federal agencies implement this payroll tax relief, effective September 1, 2020 and through December 31, 2020. Here are the specifics:
- For any federal employee earning up to $104,000 per year (grossing less than $4,000 per pay period), effective with the first pay date in September 2020 and through the last pay date in December 2020, the employee’s payroll office will cease withholding the employee’s portion of the Social Security (FICA) tax; that is, 6.2 percent of gross wages. The total amount of the FICA tax not withheld will be deferred and supposedly paid by the employee via payroll deduction during the first part of 2021.
- A federal employee making less than $104,000 annually cannot choose to “opt out” of the FICA payroll tax deferral program. The 6.2 percent FICA tax simply will not be withheld from the employee’s paycheck.
- According to IRS Notice 2020-65, federal payroll offices will supposedly (there has been no official guidance and information about this from the Office of Management and Budget) withhold from an employee’s paycheck the FICA taxes deferred (the total amount deferred between September 1 and December 31, 2020) starting in January 2021. The total amount of FICA taxes not withheld from an employee’s paychecks between September 1 and December 31, 2020 will be withheld from that same employee’s paychecks ratably between January 1, 2021 and April 30,2021. If necessary, an affected employee supposedly could directly pay the amount due to the agency rather than having it deducted from the employee’s wages during early 2021.
It is important to present some of the more difficult issues associated with this temporary tax relief, as well as to recommend to affected employees what they need to do as far as paying back what they owe in deferred FICA payroll taxes. The following example will make it easier to understand:
Carla is a federal employee who earns $100,000 a year. This is her 2020 gross salary as shown on her SF-50. She pays $2,200 a year in health insurance (FEHB) premiums and contributes $2,700 to her health care flexible spending account.
Carla’s gross salary per pay date (26 pay dates) is:
$100,000/26 = $3,846.15
Carla also has deducted from her gross pay: FEHB program health insurance premiums in the amount of-
$2,200/26 = $84.62
and FSAFEDS health care flexible spending account contributions in the amount of:
$2,700/26 = $103.85
The amount of Carla’s bi-weekly gross pay that is subject to FICA tax is:
$3,846.15 minus $84.62 minus $103.85 = $3,657.68
This is because health insurance premiums and flexible spending account contributions are deducted from one’s gross pay before all taxes, including FICA taxes.
Starting with Carla’s first pay date in September, the employee FICA tax amount of 6.2 percent of $3,657.68, or $226.78, will not be deducted but deferred.
Suppose there are 10 pay dates between now and December 31, 2020. That means that a total of 10 times $226.78, or $2,267.76 of FICA taxes, will not be withheld from Carla’s paychecks and deferred into 2021.
Starting with her first paycheck in January 2021 and ending with her second paycheck in April 2021 (or third if there are three pay dates), Carla will have the $2,267.76 withheld from her paycheck. If there are 10 pay dates between January 1 and April 30, 2021, Carla will have $226.78 deducted from each of her paychecks. Note that the $226.78 being deducted will be in addition to the FICA tax being deducted from her biweekly paycheck for the salary she is earning during the period January 1 through April 30, 2021.
A few observations and comments:
Suppose Carla were to retire on Dec. 31, 2020. She therefore would not be on the payroll effective January 1, 2021. How would she pay back the $2,267.76? Some possibilities: (1) Make a payment from her savings directly to her agency immediately before she retires; or (2) if possible (this has not been proposed), have the $2,267.76 deducted from her lump-sum payment for unused annual leave.
In short, while employees earning less than $104,000 during 2020 will see more in their net pay between now and the end of 2020, they must be aware of what is going to happen during the first four months of 2021 in which there will be additional withholding from their paychecks. In reality, employees are encouraged to set aside these short-term “savings” in anticipation of having to paying them back in just a few months.
If any employee decides to leave federal service or retire from federal service between now and December 31, they are highly encouraged to set aside (in a liquid savings account or money market fund) any amount of deferred FICA taxes to pay back what they owe in deferred FICA taxes. This is because they most likely will have to repay the full amount of deferred FICA taxes before they leave or retire from federal service. It should also be noted that if any non-withheld FICA taxes are not paid back by May 1, 2021, then the IRS will impose interest and penalties on the unpaid balance.
Also, an employee earning less than $104,000 during 2020 but who leaves or retires from federal service before December 31, 2020 and is paid for unused annual leave hours in a lump-sum payment will nevertheless have the employee’s portion of the FICA tax deducted from the lump-sum payment. This assumes that the amount of the lump-sum payment, together with total wages paid year-to-date do not exceed the maximum Social Security wage base of $137,700 for 2020.
There has been some talk in the Trump Administration that the deferred FICA payroll tax liability that employees have to pay back would actually be “forgiven” and therefore not have to be paid. This “forgiveness of payroll tax liability” is highly unlikely. While the President can delay the payment of taxes, only Congress is allowed eradicate them. With a majority of Democrats in the House of Representatives, this is unlikely to happen.
Moreover, with the Social Security trust fund depending so heavily on FICA taxes to keep it afloat, getting rid of the employee portion of the FICA tax – even temporarily – would worsen the Social Security finances. This means that federal employees, while benefiting in the short-term by not having to pay the FICA tax on their current wages, should be prepared in early 2021 (or earlier, if necessary) to pay back in full what they owe in deferred FICA taxes. As a result, they can hopefully look forward to receiving and benefiting from a full Social Security retirement check that they earned during their working years and rightly deserve.
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Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those, Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.