As the end of the year approaches, neither the IRS nor the federal payroll processors have issued further guidance for federal employees whose Social Security taxes (also known as the OASDI withholding) have been temporarily suspended since September to repay the difference.
That’s becoming a growing concern for many employees—especially those set to join the annual spike in federal retirements that occurs around the turn of the year—because of the obligation to repay the difference by April 30 or else face potential tax penalties. The only guidance issued so far, dating to late August and early September, speaks only of doing that through increased regular payroll withholding.
Those retiring or otherwise leaving the federal workforce but not continuing to work for salary would not be able to make the repayment in that way since they would no longer have Social Security-taxable earnings. Employees thinking of leaving the government for the private sector meanwhile have questioned how they could make such arrangements with a new employer, especially if they have a break in time before starting new jobs.
Since September, federal employees with Social Security-taxable earnings below $4,000 in a pay period have not been paying their regular 6.2 percent withholding toward that system. Deductions such as pre-tax payment of FEHB and FEDVIP premiums and flexible spending account set-asides lower the Social Security taxable amount to below the threshold for some employees; TSP investments do not, however.
Change Likely Affected Most Employees Under FERS
Given federal salary patterns, the change likely affected the majority of employees under FERS; CSRS employees don’t pay into Social Security. For those affected, the impact could range from hundreds to several thousand dollars, depending on their salary.
The suspension, ordered by President Trump as an economic stimulus measure, is voluntary for private sector employers and even some who adopted it—apparently a small number, but there has been no full accounting—allowed individual employees to opt out. While the USPS as a semi-corporate entity was allowed to opt out, and did, it was mandatory for other federal agencies and individual employees were given no choice.
Legislation was offered in Congress to allow a choice but it hasn’t advanced and even if it were to be enacted, at this point the situation would be little changed. Meanwhile, there has been no move to waive the repayment obligation, which would require a change in law.
The largest federal payroll provider, the Defense Finance and Accounting Service, continues to say this about the repayment obligation: “In 2021, normal OASDI will be withheld from wages you receive in 2021 at a rate of 6.2%. Under current IRS guidance, 2020 deferred OASDI taxes will be collected over a 4-month period. The rate of pay collected each pay period during this 4–month period in 2021 will depend on the total amount of taxes deferred in 2020 and will be different for each individual.”
It adds this: “If you separate or retire in 2020 before the Social Security tax can be collected in 2021, you are still responsible for the Social Security tax repayment.” Presumably such persons would have to square up the difference through making an additional payment when filing their 2020 tax returns in the early months of 2021 but there has been no specificity from either the payroll providers or the IRS on that point.
Employee organizations and many financial advisors have been urging those affected by the suspension to treat it as a loan—in many cases, an unwanted one—and set the additional income aside to offset the increase in withholdings over the first four months of 2021.