In accordance with President Trump’s memorandum dated Aug. 8, 2020, Treasury Secretary Mnuchin directed that between Sept. 1, 2020 and Dec. 31, 2020, eligible federal employees will have the portion of their Social Security (FICA) payroll taxes (equal to 6.2 percent of the employee’s wages) deferred.
A federal employee’s agency would pay its portion of the FICA payroll tax while the employee portion would be deferred. The Trump Administration’s purpose of the FICA tax deferral was to temporarily increase an employee’s net paycheck with the hope that the employee would spend the extra money.
Federal employees were initially told that the deferred FICA taxes would be paid in full during the first four months of 2021 via payroll deduction. The recently passed Congressional spending package signaled a 1 percent 2021 pay raise for all federal employees and allows employees who deferred FICA taxes during the last four months of 2020 to pay back the deferred taxes in equal installments via payroll deduction throughout all 12 months of 2021.
A number of problems and confusion arose when the FICA payroll tax deferral program was announced in August 2020, and questions still remain. Employees were initially told that the only employees eligible for temporary FICA tax deferral were employees whose gross salary was less than $4,000 per pay period (annual salary less than $104,000 per year). Many employees therefore assumed that the annual salary referred to is the salary appearing on the employee’s 2020 SF 50 (Notice of Personnel Action).
Unfortunately, this was not true as the annual wages referred to are an employee’s Social Security wages, as shown in Box 3 of an employee’s Form W-2. It needs to be explained that several before-taxed deductions including federal health, dental and vision insurance premiums, and flexible spending account amounts are deducted from an employee’s SF 50 gross salary in order to compute Social Security wages.
The following example illustrates:
Cherry is a federal employee whose 2020 SF-50 salary was $109,000. Cherry is enrolled in the Federal Employee Health Benefits (FEHB) program and pays $2,500 annually in FEHB insurance premiums. She is also enrolled in a health care flexible spending account (HCFSA) and contributed $2,700 to her HCFSA during 2020. Here is a summary of Cherry’s SF gross salary and deductions during 2020:
Cherry’s SF-50 gross salary: $109,000
Less: Cherry’s FEHB premiums: (2,500)
Less: Cherry’s HCFSA contributions: (2,700)
Cherry’s 2020 Social Security wages: $103,800
Cherry’s 2020 bi-weekly Social Security wages: $3,992.31
Since Cherry’s 2020 bi-weekly Social Security wages were less than $4,000, Cherry was subject to employee FICA tax deferral for the period 9/1/2020 through 12/31/2020.
Each pay date, Cherry had a total of 6.2 percent of $3,992.31, or $247.52 of FICA taxers deferred. For the period 9/1/2020 through 12/31/2020, there were 9 pay dates. A total of 9 times $247.52, or $2,227.71 of Cherry’s FICA taxes are therefore deferred until 2021, at which time Cherry will pay back the entire $2,227.71 of deferred taxes.
The initial plan was to have employees pay back the deferred FICA taxes in equal installments via payroll deduction during the first four months of 2021, starting on the first date in Jan. 2021 and ending on the last pay date of Apr. 2021. This initial plan was not finalized; in fact, the Trump Administration was hoping that the deferred taxes would be “forgiven”, thereby making the deferred taxes not a “deferral” but a “gift”. But only Congress could approve any type of federal tax forgiveness program, and Congress never considered it.
As part of the 1 percent pay increase for federal employees in 2021, Congress agreed to allow employees whose FICA taxes were deferred during the last 4 months of 2020, to have the FICA taxes repaid via payroll deduction throughout 2021 (in equal installments, spread over 26 pay dates). In the example above, Cherry had a total of $2,227.71 of deferred FICA taxes that will be paid back equally over 26 pay dates, or $2,227.71/26 equals $85.68 per pay date during 2021. Note that the $85.68 is being withheld in addition to the regular employee portion of the FICA tax being withheld from Cherry’s paycheck during 2021. Employees participating in the FICA tax deferral during the last four months of 2020 therefore need to be aware of the additional withholding from their paychecks during 2021 in order to pay back the deferred taxes.
Unanswered Questions Remain
But there still remain a number of unanswered questions associated with the employee FICA tax deferral program during the last four months of 2020, including:
· What happens if an employee who had his or her salary subject to FICA deferral starting in September 2020 but left federal service sometime before Jan. 1, 2021? Because the departed employee left federal service, the employee will not be on the federal payroll in 2021. How will any deferred FICA taxes be paid back? Will the departed employee be sent a bill by his or her former agency?
· What happens if an employee who had his or her salary subject to FICA deferral during the last few months of 2020 retired from federal service before Jan. 1, 2021? How will any deferred FICA taxes be paid back? Will the deferred taxes be subtracted from the retired employee’s lump sum payment for unused annual leave?
Any employee who had employee FICA taxes deferred anytime during the last four months of 2020 and left or retired from federal service before Jan. 1, 2021 is advised to contact their former agency as to how they need to pay back any deferred FICA payroll taxes. It should be mentioned that if a former employee owes any of the deferred FICA taxes as of Jan. 1, 2022, the former employee will likely receive a notice from the IRS. In the notice, the IRS will inform the former employee what he or she owes in the FICA tax payroll deferral. The balance will most likely have to be paid by a certain date, with interest charges and a possible late payment penalty.
What tasks should federal employees who participated in the FICA tax deferral during 2020 perform in January 2021?
Employees who are remaining in federal service during all of 2021 should:
1. Check their 2020 Form W-2 to make sure that Social Security wages (Box 3) and Social Security tax withheld (Box 4) respectively are reported correctly.
2. Add up and total employee FICA taxes deferred between Sept. 1 and Dec. 31, 2020 to make sure the total is correct. Divide the total by 26. Look at the first leave and earnings statement in 2021 and make sure that the current year (2021) FICA taxes are being withheld. Also check the leave and earnings statement to look to see whether 1/26 of the total FICA taxes deferred during 2020 are also being withheld as a separate line item.
Employees who remain in federal service in January 2021 but leave or retire from federal service sometime during 2021 should:
1. Check their 2020 Form W-2 to make sure that Social Security wages (Box 3) and Social Security tax withheld (Box 4) respectively are reported correctly.
2. Add up and total employee FICA taxes deferred between Sept. 1 and Dec. 31, 2020 to make sure the total is correct. Divide the total by 26. Look at the first leave and earnings statement in 2021 and make sure that the current year (2021) FICA taxes are being withheld. Also check the leave and earnings statement to look to see whether 1/26 of the total FICA taxes deferred during 2020 are also being withheld as a separate line item on the statement.
3. Shortly after the last pay date following departure or retirement from federal service, ask the agency for the balance remaining on the total FICA tax deferral. Ask how any remaining balance should be paid.
All employees:
Sometime in late spring or early summer 2021, go online to one’s Social Security account (www.sociasecurity.gov/myaccount) and check one’s “earnings history” section to make sure “Social Security wages” from the year 2020 were reported correctly (from the employee’s 2020 Form W-2 sent to the Social Security Administration by the employee’s agency). This step is important for every employee to perform, not only this year but every year. The reason is that the Social Security Admi9nitration determines an individual’s Social Security retirement and disability benefits based on the individual’s Social Security earnings history.
The retirement benefit is calculated based on an individual’s 35 highest years of Social Security wages, as shown each year in Box 3 of the individual’s W-2. The larger the Social Security wages, the larger the individual’s future Social Security retirement benefits. An individual therefore always wants to make sure that the correct amount of Social Security wages the individual earned in a particular year has been listed in Box 3 of the individual’s Form W-2 and reported properly.