More than a million military members earning $8,666.66 or less per month will see their paychecks increase by 6.2 percent of their basic pay beginning with the mid-September paycheck — but get ready for the bite out of your paycheck when you have to pay it back starting in January.
This affects all enlisted members, virtually all warrant officers and many officers, to include everyone up through the grade of O-4. Officers in the grade of O-5 with less than 16 years of service, and those in the grade of O-6 with less than 14 years of service are affected. Those who earn more than $8,666.66 a month will not have their Social Security taxes deferred — they’ll continue to pay the payroll taxes.
The increase, for the months of September through December, comes from a Social Security payroll tax deferral put into place by President Donald Trump’s Aug. 8 memorandum, and subsequent Internal Revenue Service guidance.
It’s a deferral of the payroll tax, designed to put more money into the pockets of employees, at least temporarily, in an effort to ease some economic problems caused by the COVID-19 pandemic, according to the Trump memo. But as of pay periods starting Jan. 1, service members (and all employees affected) will repay the money over a four-month period ending April 30. Trump’s memo does require the Secretary of the Treasury to explore ways — including legislation — to eliminate the requirement to repay those taxes. But as of now, the money will have to be repaid.
Military members and civilian employees can’t opt out of the deferral; it happens automatically, according to the Defense Finance and Accounting Office.
Most federal agencies appear to be participating in the payroll tax deferrals, requiring their employees to take the tax deferral, according to a letter from Everett B. Kelley, national president of the American Federation of Government Employees, to Office of Management and Budget Director Russell Vought. He urged the administration to allow federal workers to choose whether they wanted the tax deferral, or prefer to opt out. Reports are that few civilian employers are choosing to participate in the payroll tax cut deferral program.
Air Force, Army and Navy service members can look up their individual payroll tax amount on their Leave and Earnings Statement, labeled as “FICA-SOC SECURITY.” For the Marine Corps, the deduction is listed as “Social Security” on their LES.
There are concerns that military members will be hit hard come January, when their paychecks are automatically decreased to repay the payroll tax. Some are advising military members to put the extra money aside, so they will have the cushion once the payroll tax is collected. And if the government finds a way to eliminate the requirement to pay back that money, then you’ve created or added to your savings stash.
But one mitigating factor could make the January paycheck bite a little less painful. If a 3 percent pay raise for 2021 does become law, and if it takes effect Jan. 1 as expected, it would lessen the net effect.
For example: A service member earning $8,666.66 per month would see an increase of $537.33 per month in take-home pay during the September-December payroll tax deferral, or $268.67 per pay period.
DFAS officials haven’t yet determined how much will be collected per paycheck starting in January. But if the same schedule is followed as during the deferrals through December, that service member would be paying back the same amount per pay period. With the raise, the net effect would be less of a bite per paycheck, depending on the tax bracket.
According to the Trump memo and the IRS guidance, the payroll tax deferral applies to those whose wages are less than $4,000 for a bi-weekly pay period, or the equivalent threshold amount with respect to other pay periods.
The IRS rate of $4,000 is based on a bi-weekly pay schedule (26 pay periods), while military pay is calculated on a 12-month pay schedule. To convert the bi-weekly rate of $4,000 to monthly for service members, DFAS officials multiply $4,000 X 26 pay periods = $104,000, then divide by 12 months. That equals $8,666.66 for the monthly maximum pay rate for service members who are affected.