Pay & Benefits

Planned Payroll Tax Deferrals Create Minefield for Feds

If the deferment is made permanent, employees could see a lower payout in retirement; if not, employees could receive a large tax bill next year, union official says.

September 1, 2020 05:27 PM ET

ERICH WAGNER

The Trump administration reportedly will begin deferring payroll taxes for all eligible federal employees later this month over the objections of unions and other employee groups, who lambasted the plan as “chaotic and confusing.”

Last week, the Agriculture Department’s National Finance Center, which processes paychecks for around 600,000 employees across 160 agencies, issued a notice indicating it would implement provisions of an August presidential memorandum to defer the taxes, which fund programs like Social Security, until the end of 2020. Although the Office of Management and Budget did not respond to multiple requests for comment, the administration told Federal News Network that all federal payroll processors would act in concert to defer payroll taxes, likely between Sept. 18 and 24.

The deferrals will apply to all federal employees making less than $104,000 per year, or $4,000 per pay period. In the short term, those federal workers will see an increase in take-home pay, but absent action by Congress to forgive the debt that is effectively incurred on employees, they likely will be expected to pay that money back some time next year.

{snip}

National Federation of Federal Employees National President Randy Erwin said consequences could be more dire, as IRS guidance suggests feds may have to pay penalties and interest on the deferred payroll taxes, and if they do not have to return the money, they could see smaller annuity payments when they retire. ... “Either way, the employee loses,” he said. “If the tax deferment becomes permanent, and provided it is legal, the employee could get a lower payout in retirement. If the deferment is temporary, the employee risks getting a huge tax bill plus interest and penalties early next year.”

And Ken Thomas, national president of the National Active and Retired Federal Employees Association, said he too has encouraged members not to spend the additional money that will be in their paychecks for the rest of the year. ... “I hope federal employees see this for what it is: a short-term loan that will need to be repaid in full, and not an increase in take-home pay,” Thomas said. “Unfortunately, I worry that millions of federal workers will be caught off guard by the size of their tax bill next year.”