Deferred Payroll Taxes!!!

DFAS has now provided notice that it will implement system changes to defer employees’ withholding of social security wages. This change only applies to employees under the wages threshold and subject to social security tax. This change is due to the Presidential Memorandum issued on August 8, 2020 which is intended to address the ongoing pandemic. The withholding of social security wages, Old Age, Survivors, and Disability Insurance (“OASDI”), is referred to as the “payroll tax,” which you may have heard discussed in the news. The Department of the Treasury/IRS issued guidance on August 28, 2020.

What does this mean?

This means that employees whose gross (pre-tax) social security wages (Old Age, Survivors, and Disability Insurance or OASDI) are less than $4,000 in any given pay period, will not see a deduction for OASDI. In other words, you will see an increase in your paycheck.

That’s great, isn’t it?

It may be great for the short term, but that amount is still considered owed, and you may have to pay it back when you file your taxes next year. So, instead of paying it each pay period for the rest of this year, you may have to pay it back between January 1-April 30 of next year. Employees should consult a tax advisor for individual tax specific questions.

Why is it that I may have to pay it back?

In the Presidential Memorandum, the Trump administration stated that it will “explore” making the deferral permanent, by forgiving the tax, so that it would not have to be paid back. However, there has not been a final action to make it permanent. So, employees should expect that it will have to be paid back, unless and until a final action has occurred to forgive the tax.

I make over $4000 a pay period, what does this mean for me?

You will not see a change in your paycheck based on the Presidential Memorandum.

I don’t normally have an OASDI deduction in my paycheck, what does this mean for me?

This is more than likely because you are under the CSRS retirement system. You will not see a change in your paycheck based on the Presidential Memorandum.FROM VA FSC

Subject:  Deferred Payroll Taxes                                    

Background:  In response to the Presidential Memorandum issued on August 8, 2020, and the Department of the Treasury/IRS guidance issued August 28, 2020, DFAS will implement system changes to defer employees’ withholding of 6.2% of social security wages for those employees under the wages threshold and subject to social security tax.

The guidance will be implemented according to the expectation that all Federal Civilian Payroll Providers will act in unison. As such, no Payroll Providers, Departments/Agencies, nor employees will be able to opt-in/opt-out of the deferral.  The elimination of the withholding of employee deductions for the applicable employees will be effective the second paycheck in September, pay period ending September 12, 2020, pay date September 18, 2020. 

VA’s Payroll Provider (DFAS) will defer the Social Security (Old Age, Survivors, and Disability Insurance or OASDI) employee deductions for all employees whose gross social security wages are less than $4,000 in any given pay period through pay period ending December 19,2020 pay date December 24, 2020.  Applicability will be determined on a pay period-by-pay period basis and could vary according to the wages subject to OASDI withholding.  The deferral will not impact those employees in Retirement Plans not subject to Social Security withholding (i.e. CSRS).

Please be advised that the IRS guidance advises that the deferred amount of OASDI tax be collected between January 1-April 30, 2021.  The IRS is still working to determine how the deferral and collection will impact employees’ W-2s.  Employees should be made aware that the temporary deferral of the 6.2% OASDI withholding does not eliminate them from being liable for the taxes deferred in 2020 should they depart from Federal Civilian Employment. 

Additional information and guidance will be provided as it is received.