On Aug. 8, 2020, President Donald Trump signed an executive order that deferred payroll tax collection from Sept. 1, 2020, through Dec. 31, 2020.
The deferral impacted all military members and many federal government employees and civilian workers.
But, the change was temporary and did not change the tax laws (only Congress can do that).
Read on to see what you need to know about social security tax repayments for your 2021 tax return, what to do with your corrected W-2, and how payroll tax deferall and repayment works.
Table of Contents
- How Does the Military Tax Deferral Impact 2021 Taxes?
- What is the Payroll Tax Deferral?
- Repaying Deferred Payroll Taxes
- How Do Payroll Taxes Work?
- Who Did the Payroll Tax Deferral Apply to?
- Payroll Tax Deferral FAQs
- Why couldn’t I opt-out of a payroll tax deferral?
- Will this impact my tax return?
- Which Pay Grades Were Impacted by the Payroll Tax Deferral?
- How Much Was Withheld?
- What if I was Promoted or Received a Raise During the Deferral?
- Did the Payroll Tax Waiver Apply to Combat Pay, Special and Incentive Pay or Allowances?
- Did it Apply to Re-Enlistment Bonuses?
- Did the Tax Deferral Impact Deployed Service Members?
- Were Military Retirees or Retirees from the Federal Employees Retirement Systems (FERS) affected?
- Where Can I Get More Information?
How Does the Military Tax Deferral Impact 2021 Taxes?
Most military members can file their 2021 taxes normally. But, some may need to file a refund request or tax amendment. Military members who caught up on their 2020 social security taxes in 2021 will receive a corrected W-2 for 2020, called a W-2C.
Some service members (particularly reservists and National Guard members) may not have fully repaid their deferred social security taxes.
For example, Guardsmen and reservists who were on active duty orders during the deferral, but returned to drill status during repayment may still owe if their 2021 military income was too low to deduct all of their taxes.
In these cases, the Defense Finance and Accounting Service (DFAS) may continue to withhold some 2020 social security taxes from service members in 2022.
What to Do with a Corrected W-2
If you receive a corrected W-2 for 2020, check to make sure that the only change is the number in box 4: social security tax withheld. This number should be higher than in your original W-2, equal to 6.2% of box 3.
Remember to keep your W-2C as proof that you have paid all of your social security taxes.
You shouldn’t need to change or amend anything for your 2020 tax return. Your corrected 2020 W-2 won’t impact your tax return filing for 2020 or 2021, EXCEPT if:
- You had multiple sources of earned income (W-2 income and self employment income) as an individual in 2020, and
- Your combined earned income as an individual (not as a couple) was greater than $137,700, and
- Your total social security taxes paid or withheld for 2020 as an individual is now more than $8537, and
- You want your excess social security taxes paid returned to you.
Normally in these situations, you’d receive any extra taxes you paid back in your refund after filing your tax return.
But due to the deferral, the IRS could not reconcile excess social security tax withholdings since they hadn’t been repaid yet.
So, you’ll need to file IRS Form 843 by mail for the IRS to refund your excess social security tax withholdings.
If your W-2C shows changes other than the social security tax (box 4), you may also need to file an amendment (Form 1040-X) if the changes impact your tax return.
If you are not certain if there is an impact, speak with a tax professional. Military OneSource tax consultants are free for military members.
What is the Payroll Tax Deferral?
While looking for ways to bolster the economy in the early days of Covid-19, the Trump Administration considered creating a payroll tax holiday to put more spending money in people’s pockets.
But, only Congress can change the federal tax code, and they didn’t approve it. So, President Trump’s Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing Covid-19 Disaster temporarily deferred some federal payroll taxes instead.
The payroll tax deferral only impacted the FICA Social Security tax – around 6.2% of your base pay.
Repaying Deferred Payroll Taxes
From Sept. 1 to Dec. 31, 2020, military members should have received an extra Leave and Earnings Statement each pay period (or an increase on their usual LES), showing the deferred amount.
President Trump signed the Consolidated Appropriations Act of 2021 on Dec. 27, 2020, spreading the deferred tax repayment period over 12 months. (Originally, taxes were supposed to be repaid by April 30, 2021).
- Current service members: If you’re active-duty military, your 2021 leave and earnings statements should show where DFAS automatically deducted your repayments from Jan. 1 to Dec. 31, 2021.
Reservists and Nationals Guardsmen may have seen differing amounts collected each pay period, according to DFAS, and repayment collections may continue into 2022.
DFAS collected 2% of Guardsmen and Reservists’ available net income from weekly, mid-month and end-of-month pay until the total deferred taxes are repaid.
If DFAS did not withdraw all of the deferred social security taxes you owe but you’re still in the military, contact your finance office and DFAS to get the situation corrected.
Employers (effectively DFAS) are responsible for ensuring social security taxes get paid, including deferred taxes. But, double-checking is in your best interest.
It may be tempting to make the payments to the IRS (US Treasury) yourself if you’re having an issue with DFAS not collecting the taxes yet. Resist that temptation.
DFAS and the IRS are different government agencies. If you pay the IRS directly, DFAS will still try to collect from you to meet their legal obligation. Only pay directly if DFAS tells you to (in writing!).
- Separated Veterans and Retirees: If you separated or retired from the military before your deferred social security taxes were repaid, you are still on the hook for the Social Security taxes.
DFAS withheld social security taxes from some service members who separated in 2021 as a lump sum from their final paycheck. Others may have received a statement with an amount due to the federal government. Follow the payment instructions provided in the statement.
- Self-employed: If you separated prior to 2020 and became self-employed, had a side-gig or became a household employer, you might have chosen to defer your payroll taxes. If so, you have two years to repay withheld taxes.
You can find directions for self-employed individuals to pay deferred social security taxes at irs.gov.
You should have received a CP256V Notice from the IRS in November if you chose to defer paying certain Social Security taxes under the CARES Act reminding you to begin paying deferments before the end of 2021.
How Do Payroll Taxes Work?
Employers collect payroll taxes for federal, state and local taxes, according to the withholding set on your W-4.
Your military Leave and Earnings Statement (LES) includes a section showing your Federal Insurance Contributions Act Social Security tax, Medicare tax and other withholdings. (Marine Corps LESs may lump withholdings under Social Security, while civilian pay stubs may label it OASDI, an acronym for Old Age, Survivors and Disability Insurance).
Here are the normal withholding amounts:
- FICA Social Security
- 2020: 6.2% of your first $137,700 in annual earnings;
- 2021: 6.2% of your first $142,800 in annual earnings;
- 2022: 6.2% of your first $142,800 in annual earnings;
- There are no social security withholdings above these income levels
- FICA Medicare – 1.45% with no income limits; those who earn more than $200,000 (or $250,000 filing jointly and $125,000 married filing separately) annually have a 0.9% Additional Medicare Tax withheld
Employers pay the same taxes in an equal amount to their employees. Individuals who are self-employed pay both portions of the payroll taxes.
Who Did the Payroll Tax Deferral Apply to?
The Payroll tax deferral wasn’t mandatory for employers because an executive order does not change federal law.
While the military and many federal government organizations participated, many private companies did not.
It also only applied to those who earned $104,000 or less per year (defined by the memorandum and the IRS as $4,000 per bi-weekly pay period). The $104,000 annual rate equated to a monthly rate of $8,666.66. So, your tax was only deferred if you earned less than $104,000 per year and your employer participated in the program.
Deferrals impacted most military members below the pay grades of O-5 (Lt. Colonel or Commander) or W-5 (Chief Warrant Officer Five) FICA Social Security tax.
The Internal Revenue Service (IRS) released guidance (with IRS Notice 2020-65) on how the payroll tax deferral works. The Defense Finance and Accounting Service (DFAS), which provides payment services for the U.S. Department of Defense also has an informational page.
Payroll Tax Deferral FAQs
Here are answers to some questions you may have:
Why couldn’t I opt-out of a payroll tax deferral?
Payroll deferrals were automatic. The federal Office of Management and Budget (OMB) directed all executive branch agencies to implement the tax deferral. There is nothing you could have done to prevent your payroll taxes from being deferred.
Will this impact my tax return?
The tax deferral should not impact your tax return because payroll and income taxes are two different things.
Your employer should automatically withhold your payroll tax repayments. If your employer didn’t withhold them, funds should have been forgiven or withheld during 2021.
The social security tax deferral did not impact 2020 tax return filings and it won’t impact 2021 tax return filings.
But, if you paid excess social security taxes after you repaid your deferral, then you’ll need to file Form 843. If you don’t understand, consult a tax professional.
Which Pay Grades Were Impacted by the Payroll Tax Deferral?
Service members in the following pay grades were impacted by the payroll tax deferral for Social Security:
- Enlisted service members officers at grades O-1 to O-4
- O-5s with less than 16 years of service
- O-6s with less than 14 years of service
- All warrant officers, except W-5s with 24 or more years of service.
How Much Was Withheld?
The amount of money not withheld from your paychecks is called deferred tax liability.
In short, that means you have to repay the federal government the amount you should have paid that wasn’t withheld (6.2%).
However, employers began withholding those funds at the beginning of 2021, when 2021 pay charts were in effect.
What if I was Promoted or Received a Raise During the Deferral?
If you were promoted or received a raise during that time, your deferred tax liability should not have increased.
You will have the normal 6.2% Social Security tax withholding, along with the deferred amount withheld.
Did the Payroll Tax Waiver Apply to Combat Pay, Special and Incentive Pay or Allowances?
No. Payroll tax deferrals only applied to taxable base pay.
Did it Apply to Re-Enlistment Bonuses?
No. Enlistment and reenlistment bonuses are classified as “special and incentive pay,” along with other forms of compensation, such as flight pay, sea pay, and similar forms of pay.
Special and incentive pay is subject to income taxes, but is not subject to FICA tax. See more details here.
Did the Tax Deferral Impact Deployed Service Members?
Military members who are deployed to a tax-free combat zone still pay FICA taxes.
Combat pay is only exempt from federal taxes and most state taxes. So, you should not see any specific differences due to your deployment.
Were Military Retirees or Retirees from the Federal Employees Retirement Systems (FERS) affected?
No. Payroll tax deferrals only impacted income earned through military payroll. FICA and payroll taxes are not withheld from military retirement pay or Federal Employees Retirement (FERS) pensions.
Where Can I Get More Information?
The Military Wallet columnist Jerry Zeigler contributed to this article.