Update: The wrapup funding bill passed by Congress last week and signed into law Sunday (December 27) will extend through calendar year 2021 the obligation to repay Social Security taxes that have not been withheld from the pay of many federal employees for several months.
The action comes as federal payroll processors have been preparing to begin recouping the amounts that were not withheld under an August presidential memo. That memo suspended, from September through the end of this year, Social Security withholdings for a pay period in which an employee’s pay subject to that tax was below $4,000. That applied in most agencies although the Postal Service opted out.
The original guidance from the IRS and from the payroll providers stated that the difference had to be repaid by April 30, 2021 or else penalties could apply.
Of the four major providers, the Defense Finance and Accounting Service has released the most information, recently specifying—as had been widely assumed—that the repayment would be made by increasing Social Security withholdings over an equivalent period to start 2021. Just days ago, further guidance from DFAS stated that the increase would begin with the pay period starting January 3 and continue in eight equal installments through the pay period ending April 24.
With a change in the deadline, revised guidance from both the IRS and the payroll providers likely lies ahead on issues including whether the difference will be spread out over the entire year or whether employees will have the option to choose a time period.
The latest information from DFAS also added detail to previous statements regarding what will happen if someone has left federal employment, for retirement or other reasons, before repaying the full amount—considerations that will apply regardless of the repayment deadline, and that actually would apply to more employees if the repayment is made over 12 months rather than four.
For those separating in 2021 before the deferred Social Security tax is collected in full, “you are still responsible for the remainder of your Social Security tax repayment. The unpaid balance will be collected from your final pay. If there are insufficient funds to collect the full amount, you may receive a debt letter with instructions for repayment,” it says.
It adds that for those who have separated, or still will, in 2020, “The government will pay the deferred Social Security taxes to the IRS on your behalf, and you will owe DFAS for this repayment. Collection will occur through the debt management process. A debt letter will be posted in your myPay account in January 2021, as well as sent to your address of record via US Mail. The debt letter will provide instructions for repayment; payments can be made online via Pay.gov,” it says.
While the DFAS policy specifically applies only to payrolls it services—in addition to DoD civilians and military, most notably VA, HHS and Energy—other providers likely would follow similar procedures.