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Financial Planning

Be Prepared for Your January 2021 Pay Cut

2020-12-09

Updated December 28, 2020

Earlier this year, President Trump authorized the deferral of payroll taxes for servicemembers and civilian DoD employees earning $8,666 or less per month. This deferral applies to all enlisted servicemembers, warrant officers through CW-4, and officers through O-4 (Major/Lieutenant Commander), and resulted in a 6.2% increase in take-home pay from mid-September 2020 through December 2020.

Although the President deferred these taxes for this period, only Congress can forgive taxes and they have not done so to date. Therefore, servicemembers and civilian federal employees whose taxes were deferred will have to pay them back starting in January 2021—at which time regular payroll tax deductions will also resume.

Update: On Sunday, 27 December 2020, President Trump signed COVID relief legislation, which extends the Social Security payback period over twelve months (all of 2021) instead of only four months as previously expected.  The taxes are only deferred, not forgiven.

What Does this Mean?

Throughout 2021, military families will still see approximately 5.5% less in their monthly pay than they were receiving in the last four months of 2020.  Thanks to the 3.0% military pay raise and stretching the repayments over the next 12 months, most families may be able to restrain their spending and adapt to lower pay for 2021.  For a Major or LtCdr with 14 years of service, their 2021 monthly pay will be approximately $441 lower than their comparable December 2020 pay.  For a Captain with 6 years, their monthly pay will be $334 less and for a Sergeant First Class (E-7) with 12 years of service their monthly pay will decrease by $242.

This reduction will be seen in each pay period from January 2021 through December 2021.

How Can You Prepare?

Military Families who saved the additional take-home pay over the last four months should be in good shape to weather the reduction coming in early 2021, as they can apply that savings forward. Those who did not save that money should begin planning now for the January reduction by reducing current expenses.

If your family is in need of financial assistance, we encourage you to seek financial readiness counselors on your military base or from military relief societies, such as Army Emergency Relief, Air Force Aid Society, Coast Guard Mutual Assistance, or the Navy-Marine Corps Relief Society