Trump Administration Suspends Social Security Tax Withholdings for Federal Employees

November 12, 2020

The Trump administration has allowed employers to temporarily suspended the 6.2 percent Social Security withholding from paychecks through the end of the year. The policy meant to lessen the financial pressure of low income workers during the pandemic.

Employers can choose to opt out payroll deferral program, but not everyone has that option. All federal employees making $4,000 dollars or less biweekly have seen their paychecks impacted, whether they agree or disagree with the action.

Most federal employees saw their paychecks impacted between September 12 and September 26.

Withholding Social Security taxes has been messy. Federal employees because nearly all Federal Employee Health Benefits (FEHB) premiums, and dental and vision plans, are paid from federal employee income pre-tax. Many employees who thought they made over the $4,000 dollar threshold were disappointed to see that FEHB and other withholdings dropped them below the limit.

The National Treasury Employees Union was not at all happy about this. According to the organization, “the administration’s explanation of which federal employees would be affected by the payroll tax deferral was incomplete and misleading.”

This new change affects the vast majority of federal employees. USPS and judicial agencies opted out.

Not So Much of a Relief

Deferring Social Security taxes should help people feeling the financial pressure of the COVID-19 pandemic. And on the surface, less taxes seems like a great thing.

But deferment is only a temporary solution, and not everyone is happy about it. Impacted workers argue that it’s made their financial situation incredibly complicated, especially since they are expected to repay the money through higher Social Security deductions as of January 2021.

Even the government’s largest payroll provider said that federal employees should plan on repaying the taxes. Many will have to put aside money now for repayment that the government could have been taking out of their paychecks this whole time.

At this point only employers decide whether their employees can opt out of the 6.2 percent deferment. If they choose to opt out, businesses will still have to pay their Social Security taxes.

Treasury Secretary Mnuchin said at a recent hearing that it may be reasonable to allow individual employees to opt out if they wish. He went on to say that he would discuss the issue with the administration, but there haven’t been any updates since.

How Will Repayment Work?

The Defense Finance and Accounting Service (DFAS) has yet to fully clarify how repayment will happen. However, impacted federal employees that earn less than $4,000 per pay period must fully repay the amount by April 30, 2021, unless Congress ends up waiving that obligation. Many federal workers are hopeful, but it seems unlikely at this point.

DFAS says that the deferred taxes will be collected between January and April 2021 and the total amount owed depends on the amount of taxes deferred in 2020. It will be very different for each employee.

“Individual situations will vary, but it is important to review the increase in your net pay so that you can plan for your pay to be reduced by roughly that amount in January through April of 2021, in addition to your normal 2021 tax withholdings. You can also consult with an employee assistance program financial counselor or seek assistance from a private financial advisor,” DFAS said.

DFAS went on to say, “If your pay rate increases in 2020, but your pay is still below the wage limits for the deferral, the amount of deferred taxes will increase along with the increase to your pay. For example, if an individual receives a promotion in November 2020, the amount of deferred tax would increase because the 6.2% Social Security tax would be calculated on higher wages for the remainder of 2020. The total amount of tax deferred from September to December will be collected in 2021. However, if the promotion occurs in February 2021 there would be no impact on the amount of 2020 deferred taxes being collected in 2021.”

How Will Deferring Social Security Taxes Affect Disability Benefits?

Many impacted employees are now concerned about their ability to collect disability. Whether they are federal employees or not, the policy change will hopefully not affect anyone’s ability to collect disability. Under this new policy, impacted employees will not pay into Social Security. However, once the deferral ends in January, the pot will begin to refill once employees repay the withheld taxes.

However, some government officials have discussed the idea of forgiving the withheld taxes. If that happens, the money will not be paid back and Social Security recipients could very well receive less money each month.

Others are also concerned that employees who have their taxes deferred will not be able to pay it back in 2021. Money is tight during the pandemic. Not everyone has the luxury to put money aside. If an employee uses the extra money in their paycheck for necessities instead of saving it, there won’t be any money left to repay the debt.

It’s understandably a frightening situation for many people. No one wants to lose their Social Security payments, and no one wants to owe money to the government.

This should have little to no effect on current monthly Social Security disability earnings. DIB earnings are calculated over many years, and 3 months of withheld taxes should not affect that number especially if the withholdings are paid back. You can use your Social Security statement to see how your monthly benefits will be calculated based on your time in the workforce.

If you are a Social Security disability recipient and are concerned about how these withholdings will affect you, reach out to your local Social Security office with any questions. The phone number for your local office can be found here.