The rollout of the temporary waiver of Social Security taxes for many federal employees has been “chaotic,” a bipartisan group of members of Congress has said, adding to calls that affected employees be allowed to opt out.
Some four dozen members, mostly Democrats, told Treasury Secretary Steven Mnuchin in a letter that “feedback from civil servants and service members we represent indicates that the withholding of payroll taxes has been chaotic and confusing for many of those affected. There is widespread concern among the ranks of both groups that deferred payroll taxes will lead to increased tax bills in January and potentially even fees for those who are unable to repay deferred taxes.”
“These concerns have been worsened, they tell us, by poor communication within some agencies and service branches about payroll tax deferral, particularly regarding the methods that will be used to collect deferred tax obligations beginning in January of next year,” the letter added.
Under the policy, agencies have stopped withholding the standard 6.2 percent Social Security (OASDI) tax for employees whose taxable Social Security pay for a pay period is less than $4,000. Employees affected by the change should have seen the impact by now, in the pay distribution for the pay period that ended September 26, if not also the one for the period that ended September 12.
An employee’s status could vary from pay period to pay period since the taxable amount includes irregular pay add-ons such as overtime and premium pay. Meanwhile it is reduced by pre-tax payment of FEHB and FEDVIP premiums and pre-tax flexible spending accounts—although not for TSP investments—catching by surprise some employees who thought they would be above the threshold.
The payroll providers still have issued relatively little guidance on a variety of related issues, including the requirement that the amount being waived be repaid starting in January. That presumably is to be accomplished by a doubling of Social Security withholdings until the amount is repaid, although questions remain for example regarding what will happen if an employee leaves the government before that point.
Employee organizations and financial counselors have urged affected employees to set the additional money aside, rather than spend it, so that they can draw on it when their taxes increase after the turn of the year.
The letter repeated prior calls that employees be allowed to opt out, citing decisions by many private sector companies—as well as the quasi-corporate Postal Service—to not apply the waiver. Mnuchin recently told a Senate hearing that allowing employees to opt out would be “reasonable” but there has been no indication since then that the administration will change its position.
If opting out is going to be allowed, the letter added, “We further urge you to implement such changes consistently, without threat of adverse consequences, and with clear communication. The longer it takes to initiate changes, the more complex the conversion will be for payroll providers, and the more confusing the paycheck fluctuations will be for those affected.”