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Lawmakers Demand Reversal of Automatic Payroll Tax Deferral

Posted on Sep. 9, 2020

Nearly two dozen senators are urging the Trump administration to reverse its mandatory deferral of payroll taxes for federal employees and members of the military.

“Federal workers and service members should not be used as pawns for a payroll tax scheme that many private sector employers are unlikely to join and where key questions remain unanswered,” the senators wrote in a September 8 letter to Treasury Secretary Steven Mnuchin and Office of Management and Budget Director Russell Vought.

The letter was spearheaded by Sen. Chris Van Hollen, D-Md., and signed by 19 other Democrats, the chamber’s two independent senators, and Republican Sen. Susan M. Collins of Maine. It asks the Trump administration to give federal employees and military members the choice to opt in or opt out of the deferral, noting that private sector employers have the option of whether to participate. The senators also noted that several federal employee unions have criticized the mandatory deferral.

An August 8 executive memorandum signed by President Trump directs Mnuchin to defer the withholding, deposit, and payment of the payroll tax on wages or compensation paid between September 1 and December 31 for any employee whose wages or compensation during a biweekly pay period is generally less than $4,000 before taxes.

The OMB previously indicated that the deferral would apply automatically to all federal employees, and the IRS confirmed soon afterward that its employees couldn’t opt out of the deferral.

The Defense Department’s Defense Finance and Accounting Service similarly announced September 6 that the deferral would take effect beginning with the mid-month pay period for military members and civilian defense employees.

Beyond just calling for a reversal of the mandatory deferral policy, the senators also sought clarification on whether employers or the IRS will bear responsibility for collecting deferred taxes if an employee changes jobs, as well as a cost estimate if federal agencies end up being responsible for footing the bill of unpaid deferred taxes.

In guidance (Notice 2020-65, 2020-38 IRB 1) released August 28, the IRS didn’t specifically address employees who change jobs, saying only that participating employers must withhold the deferred taxes from wages and compensation paid from January to April 2021 and that employers “may make arrangements to otherwise collect” the taxes from employees.

Military Time

House Ways and Means Committee member Donald S. Beyer Jr., D-Va., criticized the decision to automatically apply the payroll tax deferral to the military, warning in a September 8 release that it will “give the illusion of pay increases until after the election” and then require bigger tax payments later that some military members may be unprepared for.

“This is a disgraceful way to treat those who serve and sacrifice to keep us safe, and Trump’s trickery is obviously designed to help his campaign,” Beyer said.

A set of FAQs about the deferral posted on the Defense Finance and Accounting Service website offers some more information about the implementation of the deferral, such as which salary grades will have their payroll taxes deferred.

The FAQs highlight that Treasury still has unresolved questions to answer about the deferral’s implementation, as evidenced by the recurring statement “As more information becomes available . . . it will be posted here.”

Questions that the FAQs leave unanswered include whether interest or penalties will apply if the deferred taxes aren’t fully repaid by the end of April 2021, how deferred taxes will be repaid if an individual retires or separates from military service before the taxes are collected next spring, and how Forms W-2 for 2020 and 2021 will be affected.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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