The Covid-19 pandemic has caused the federal government to employ a number of monetary and fiscal policy programs to ease the burden of the pandemic on many Americans. While many of you are familiar with the Paycheck Protection Program and the stimulus checks that were sent out earlier this year, many people aren’t fully aware of the payroll tax deferral program. From September 1, 2020 to December 31, 2020, the federal government has created an option to defer the withholding, deposit, and payment of certain payroll taxes on wages and compensation. A few of the stipulations you should know are as follow:
- The deferral applies if your monthly rate of basic pay is less than $8,666.66. If your monthly pay is above this, your taxes will not be deferred. The total deferral for the year is approximately $481.74 for an E2, $772.35 for an E7, and $815.20 for an O1. The deferral represents 6.2% of your taxable income.
- This applies to most of the military. The pay grade where this begins to not apply is around the O-5 level.
- This money must be repaid next year between January 1 and April 31 unless it is forgiven — an option which may be applicable pending a decision by Treasury Secretary Steven Mnuchin. It will most likely be taken out of paychecks during this time period in the form of a payroll tax.
- In recent guidelines, employers can choose to defer the payroll taxes if they’d like. Many seem to be opting out of the program.
So what does this mean to you as a member of the military? Federal employees will not be allowed to opt out of the deferral. They are required to opt into the program.
“There is no opt-out or opt in-option,” according to an email sent to employees at the Defense Contracting Management Agency.
“No payroll providers, departments/agencies, nor employees will be able to opt-in/opt-out of the deferral. The Office of Management and Budget and the Office of Personnel Management [and] the Defense Finance and Accounting Service will implement the guidance according to the expectation that all federal civilian payroll providers will act in unison,” an email sent to Federal News Network reads.
Many indications suggest that the deferral program will start with federal employees’ second paycheck in September as DFAS implements the policy that was announced in late August. It means seeing 6.2% more per paycheck for the rest of the year. But we don’t recommend spending that money as it will likely be recouped next year. If you’re in a leadership position, be sure to let your service members know that they will likely be paying this money back next year. They may feel like they are being paid more, but in actuality, they are not.
So What should you do with the extra money?
Our recommendation is to put that money somewhere that you won’t lose it such as an FDIC insured high yield savings account. Take a look at options such as American Express or Capitol One High Yield Savings accounts. These generally have higher interest rates than most and are backed by the FDIC. The last thing you should be doing is gambling this money away or spending it on something frivolous.
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Any accounting, business or tax advice contained in this communication is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.