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Strategizing How to Pay Back Tax Deferrals

Payroll tax deferrals have gone into effect for over 600,000 federal employees and will continue until the year’s end. Since its announcement, this program has been fraught with confusion—initially for example, only federal employees making under $4,000 per pay period or $104,000 annually before any deductions were said to be subjected to this ruling¹. However, payroll processors applied tax deferrals to those making under $4,000 per pay period after other pre-tax deductions, such as healthcare and flexible spending, vastly increasing the number of federal employees receiving tax-deferrals². The mixed signals haven’t stopped there. Limited information has been released regarding how affected military and civilian federal employees are expected to pay these deferred taxes back, be it via monthly installments starting in January 2021, or as a lump-sum all due at once before the end of this upcoming tax season. It’s also unclear what interest and penalties federal employees may face if the taxes aren’t paid back on time. 


With all of this uncertainty, it’s best to be prepared for anything, so that regardless of what rules and regulations come about, you’ve set yourself up to handle them. An easy strategy you can implement is to add an allotment on your paystub that will filter a portion of your paycheck into a savings account. Thus when the time comes to pay it back, you will have the funds reserved to do so. You can set up allotments online through your agency’s HR web portal. Depending on the agency, you are typically only allowed to specify a dollar amount for allotments, not a percentage like you can for tax withholdings or TSP contributions. Given that payroll taxes reduce your gross paycheck by 6.2%, you will have to calculate 6.2% of your biweekly pay and set that as the dollar amount allotted for your payroll tax liability. If you anticipate working a lot of overtime in the next few months, particularly during the holiday season, you may want to allocate a little bit more to give yourself some cushion. 


Some may be tempted to forgo this strategy and wait until next year, instead opting to refund the deferrals with pay typically allocated towards their TSP contributions. It’s important to avoid this strategy if you can, as you don’t want to miss out on the 5% employer match. However, if you find yourself strapped for cash and would truly benefit from the tax deferral, it may make sense to pay it back with other funds later down the line. Our retirement strategists are here to talk you through different strategies and to help you implement a plan that works for you and your family. No matter what situation you are in, it’s important to start strategizing in advance to avoid getting stuck in a tough spot in 2021.

Citations

¹Russell, Roger. “IRS Gives Some Answers to Payroll Deferral Questions.” Accounting Today, Accounting Today, 10 Sept. 2020, www.accountingtoday.com/news/irs-gives-some-answers-to-payroll-deferral-questions. 


²Wagner, Erich. “More Feds Subject to Mandatory Payroll Tax Deferral Than Initially Thought.” Government Executive, Government Executive, 25 Sept. 2020, https://www.govexec.com/pay-benefits/2020/09/more-feds-subject-mandatory-payroll-tax-deferral-initially-thought/168792/

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