Updated: February 7, 2021
Military payroll tax deferral is a hot topic. Members of the armed forces had a portion of their payroll taxes deferred through the end of 2020. The intention was to provide economic relief to those impacted by COVID-19. Yes, the extra money each month was great but did it help or hurt you in the long run. Since it was a temporary order, everyone wants to know how it works and what it means for your pay in the future.
The military payroll tax deferral 2020 was from President Trump’s August 8, 2020 memorandum. Under Internal Revenue Service (IRS) guidance, it postponed the withholding of Social Security tax for service members until December 31, 2020. The tax deferral was meant to give those serving additional income each month during these financially challenging times.
The deferment of payroll tax for the DoD began on September 12, 2020, for mid-month pay. Here’s what you should know about the payroll tax deferral and the financial impacts happening in 2021 because of it.
What is the Payroll Tax Deferral?
It’s was the deferment or postponement of paying Old Age, Survivors, and Disability Insurance (OASDI), which is the official name of Social Security. On your Leave and Earnings Statement (LES), your Social Security is taken out in the Deductions or Field 11. It’s broken up into two parts: FICA-SOC SECURITY, 6.2% of your basic pay, and FICA-MEDICARE, which is 1.45%.
Under the order, service members did not have their 6.2% FICA Social Security withheld for the last few months of 2020.
More on How to Read Your LES and Understand It.
Can Military Opt Out of Payroll Tax Deferral?
No, the military cannot opt-out of payroll tax deferral. It’s not optional. The order was a voluntold program, meaning participation was mandatory for all military and federal civilian employees. Any member of the military or civilian employees that earned less than $104,000 per year was eligible. This comes out to those who made less than $8,666.66 in monthly basic pay or $4,000 per pay period. Those individuals had their Social Security deferred until December 31, 2020.
Here is the IRS guidance on the Presidential memorandum.
Related: How to Plan Your Payroll Tax Deferral Money
What the Payroll Tax Deferral Means for the Military
It means that from mid-month Sept 2020 until the end of 2020, a service members’ monthly pay increased by 6.2%. Now, this can seem exciting at first—who doesn’t want hundreds of dollars extra every month—but (as of now), you have to pay the money back. And the payback window is small.
Starting January 1, 2021, your Social Security tax withheld started up again, but instead of 6.2% being withheld, your withholdings will increase to 12.4% from January 1 to December 31, 2021.
Service members and their families that needed financial help got some relief, but the money has to be repaid. Things could change in the future as of now. Repayment began on January 1, 2021. If you separated or retired before the end of 2020, you’ll still have to pay the money back just like active-duty service members. See below for more info on the collection process.
Here is the guidance from DFAS.
What You Should Do With the Money
Some people have not been financially impacted by COVID-19, while others have been impacted severely. It’s like tornado damage. One house can be leveled while the other is untouched.
If you’re lucky enough to be untouched, then SAVE THE MONEY! If you don’t need it, don’t spend it. Setting the money aside in a savings account will make your life easier come payback time at the beginning of 2020.
That said, if you need the money to pay your bills or put food on your table, that’s what the money is for. In those cases, you should spend the money to help you through these difficult financial times. But if you spend the money, you need a plan to pay it back. If paying your bills is a struggle now, what will be different in 2021? Make a plan now of how you’ll pay the money back. There may be a chance you won’t have to pay it back, but that’s slim, and you shouldn’t count on that.
If you need to spend the Social Security tax savings, I would HIGHLY encourage you to meet with your installation financial counselor. A financial counselor can help you create a game plan to pay back the taxes in 2021. Not only are they a financial professional with military expertise, but they’re also a local financial expert. They’re going to know all of the resources available in your area to help with your financial needs.
More information on financial counselors: How to Get Free Financial Help
How to Save Your FICA Social Security Payroll Tax
The best way to save your FICA-SOC SECURITY money is to automate the savings. The easiest way to do that is to set up an automatic transfer from your checking to your savings account. Or you can set up an allotment with DFAS. You can schedule an allotment to start through your MyPay account.
Get your automatic savings scheduled right now. Planning to save the money now will make it so you never get used to having the additional income in your checking account. Setting the tax money to save automatically will help make the money payback more manageable, but it will also be there if you do need it to help pay your monthly expenses.
More on DFAS: What is DFAS?
For more information, you can check out the DFAS military member’s FAQs on the tax deferral. Or you can review the DoD military fact sheet for the latest details.
The Collection Process
The military payroll tax deferral of 6.2% will stop at the end of December 2020. The collection process will begin in January 2021. This means you’ll begin paying your regular Social Security payroll taxes again. You’ll also have an additional deduction to repay your deferred payroll taxes.
The Consolidated Appropriations Act, 2021 passed, which allows for the collection process to extend from January 1 to December 31, 2021. Previously, the collection process would have been from January 1 to April 30, 2021. Even payments will be taken from your monthly pay over the next 12 months. The remarks section of your LES will contain a note with your payment information and will show the remaining amount of your payroll tax deferral debt.
Collection Process for Separated Service Members
If you separate from service before repaying your deferred payroll taxes, you’ll either have the debt taken from your final pay or you’ll receive a letter from the DoD with instructions on how to repay your debt.
For service members that retire before the collection process, the debt will be taken out of their retirement pay.
Calculating Your Repayment
To calculate the total amount of deferred payroll taxes you’ll owe, multiple your base pay for September through December 2020 times 6.2%. That’s the amount that’ll be collected from your pay.
For example, if you received $16,000 in base pay for the four-month period your repayment would be $992. Which is $82,67 per month over the 12 month collection period.
That looks like $16,000 X .062 = $992.
Keep in mind this is in addition to the normal 6.2% payroll tax that will start again in January 2020.
Like any other new program for the military, there are some kinks to work out and the guidance will probably change. So for now, if you need the relief, that’s 100% understandable. But you should have a plan to use the money most effectively and for how you’ll pay it back. If you don’t need the additional income, put the money in your savings account. That way it’s ready when it comes time to pay it back. Having the money set aside will ensure your monthly budget is not negatively impacted during the payback period.
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Photo by Seaman Juel Foster
