Are Civil Service Retirees Required to Pay Federal Taxes on Their Annuities?
- Federal employees enjoy retirement benefits through the Civil Service Retirement System (CSRS). As a federal employee, you make mandatory payments to the retirement system through payroll deduction. Your federal pay is not subject to Social Security taxes and the CSRS system essentially replaces the Social Security program that non-federal employees pay into. The government also matches your contributions to the plan the same way employers in the private sector match Social Security withholding. Depending on the division of government you serve, your contribution will be between 7 and 8 percent of your gross pay. Because this program replaces the traditional Social Security program you cannot make tax deductible contributions to the plan.
- The U.S. Office of Personnel Management (OPM) processes all CSRS retirement payments. Your benefits are treated as regular income payments, and the OPM uses a standard wage withholding table to calculate the amount of tax that is withheld from your pension check. By default, the OPM deducts federal income tax from your benefits as if you are married and claim three exemptions.
- To opt out or change the amount of federal income tax withholding from your CSRS retirement payments you must file a Form W-4P with the OPM. If you opt out, the OPM will not deduct any tax from your benefits. You can also make elections to have a flat amount of tax withheld from your benefit payments or change the default filing status and exemption settings.
- While you have the option of opting out of federal income tax withholding from your CSRS retirement payments, you should be aware that doing so may cause a federal tax liability when you file your annual income tax return. The IRS considers your CSRS retirement benefits as regular income, and the pension you receive is therefore fully taxable. If you owe more than $1,000 in federal income taxes in any year as a result of insufficient withholding, the IRS may require you to make estimated tax payments to prevent future tax debt.