Treasury Secretary Steven Mnuchin testifies before the House Select Subcommittee on the Coronavirus Crisis on Tuesday, Sept. 1.

Treasury Secretary Steven Mnuchin testifies before the House Select Subcommittee on the Coronavirus Crisis on Tuesday, Sept. 1. Graeme Jennings/Pool via AP

Planned Payroll Tax Deferrals Create Minefield for Feds

If the deferment is made permanent, employees could see a lower payout in retirement; if not, employees could receive a large tax bill next year, union official says.

The Trump administration reportedly will begin deferring payroll taxes for all eligible federal employees later this month over the objections of unions and other employee groups, who lambasted the plan as “chaotic and confusing.”

Last week, the Agriculture Department’s National Finance Center, which processes paychecks for around 600,000 employees across 160 agencies, issued a notice indicating it would implement provisions of an August presidential memorandum to defer the taxes, which fund programs like Social Security, until the end of 2020. Although the Office of Management and Budget did not respond to multiple requests for comment, the administration told Federal News Network that all federal payroll processors would act in concert to defer payroll taxes, likely between Sept. 18 and 24.

The deferrals will apply to all federal employees making less than $104,000 per year, or $4,000 per pay period. In the short term, those federal workers will see an increase in take-home pay, but absent action by Congress to forgive the debt that is effectively incurred on employees, they likely will be expected to pay that money back some time next year.

In testimony before Congress on Tuesday, Treasury Secretary Steve Mnuchin indicated the White House will request legislation on the matter.

“It’s quite clear that again the president is going to go to Congress to get authority, but we need congressional authority—this is a deferral—we need congressional authority,” he said. “[This] is like other tax deferrals that were very helpful for people. This is money in people’s pocket that they need now that is very important and very meaningful.”

But federal employee organizations don’t see it that way. National Treasury Employees Union National President Tony Reardon blasted the rollout of the deferral as “chaotic and confusing.”

“Right now, even the effective date is unknown, which is especially unsettling for federal workers who deserve to know what is being done to their paychecks and when,” Reardon said. “But even worse, the administration has not provided information to federal employees about the implications this deferral will have on future tax obligations. Since the administration has failed to educate its own workforce, we have warned the employees we represent that while their paychecks might be larger for the rest of 2020, they need to be prepared to pay back the amounts that were deferred, starting in January.”

National Federation of Federal Employees National President Randy Erwin said consequences could be more dire, as IRS guidance suggests feds may have to pay penalties and interest on the deferred payroll taxes, and if they do not have to return the money, they could see smaller annuity payments when they retire.

“Either way, the employee loses,” he said. “If the tax deferment becomes permanent, and provided it is legal, the employee could get a lower payout in retirement. If the deferment is temporary, the employee risks getting a huge tax bill plus interest and penalties early next year.”

Everett Kelley, national president of the American Federation of Government Employees, called the initiative a "scam" that could have broader implications for Social Security as a program.

"Workers will have to pay double their regular payroll tax rate during the first four months of 2021, and if they cannot do so, they will have to pay interest and penalties on amounts still owed if they're not paid back by May 1, 2021," Kelley said. "In addition, any talk of making this deferral permanent is solely about defunding the Social Security system, so that it can be declared bankrupt and discontinued. No one should view this as anything other than attempt to undermine Social Security."

And Ken Thomas, national president of the National Active and Retired Federal Employees Association, said he too has encouraged members not to spend the additional money that will be in their paychecks for the rest of the year.

“I hope federal employees see this for what it is: a short-term loan that will need to be repaid in full, and not an increase in take-home pay,” Thomas said. “Unfortunately, I worry that millions of federal workers will be caught off guard by the size of their tax bill next year.”

This story has been updated to include additional comments from federal employee groups.