Agencies Outline How Feds Will Repay Payroll Taxes That Have Been Deferred

Federal payroll processors have begun announcing plans for how they will recoup federal employees’ Social Security taxes deferred as part of a controversial Trump administration program between last September and December.

Last year, President Trump issued a memorandum allowing employers to defer payment of payroll taxes between September and December 2020. Although the vast majority of private sector employers—and federal employers outside of the executive branch—declined to do so, the administration forced all executive branch employees and members of the military to defer their payroll taxes.

Democratic lawmakers were unable to pass legislation to make the deferral optional for feds, but the omnibus spending package signed by President Trump last month includes a provision extending the deadline for employees to pay back the unpaid taxes from April to the end of 2021. In recent days, several federal payroll processors have explained how they will implement the provision. The news was first reported by Federal News Network.

The Defense Finance and Accounting Service, which handles payroll for the Defense Department and the military service branches, said that for civilians and active duty military service members, the deferred taxes will be taken out in equal installments over the course of all 24 semimonthly pay periods in 2021. The system is more complicated for reservists and members of the National Guard.

“For reservists and guardsmen performing intermittent duty in 2021, the amount collected may not be the same every pay period,” the agency wrote. “DFAS will collect 2% of net available from each weekly, mid-month and end-of-month pay, and will continue until the deferred taxes have been repaid in full.”

Civilian Pentagon employees who retire or otherwise leave the Defense Department this year will either see the entire remaining balance taken out of their last pay check, or those employees may “receive a debt letter with instructions for payment.”

The Agriculture Department’s National Finance Center, which provides payroll services for more than 600,000 employees across the federal government, recently updated its FAQ on the payroll tax deferral to spell out how the deferred taxes will be recouped over the course of 2021. Employees whose agencies use the National Finance Center will see the deferred taxes taken out in 26 “even installments” running between the last paycheck from 2020 through the 25th biweekly pay period this year.

The agency said that employees will not have an option to have their taxes collected in any other way, unless they leave federal service before the end of 2021.

“There is not a way for employees to elect one lump sum payment,” the agency wrote. “The primary repayment method will be through payroll deduction starting in [pay period] 26, 2020, through [pay period] 25, 2021, for those employees still on the rolls.”

Agencies that use the National Finance Center will pay the deferred payroll taxes of feds who retired during the deferral period last year, but those retirees will be expected to pay their former employer back.

“Your agency will pay the deferred Social Security taxes to the [Internal Revenue Service] on your behalf, and you will owe your agency for this repayment,” the FAQ states. “Collection will occur through the NFC debt management process. A debt letter will be sent to your address of record via U.S. Mail. The debt letter will provide instructions for repayment.”

Similarly, employees who retire this year will also receive a debt letter with instructions on how to repay their agency for any remaining deferred taxes that must be recouped.

The Interior Department’s Interior Business Center, which provides payroll services to more than 150 “federal organizations,” did not respond to a request for comment Wednesday on how it is handling repayments.