INSIGHT: Trump’s Payroll Tax Deferral Won’t Provide the Assistance the Economy Needs

On Aug. 8, 2020, President Trump signed one executive order and three executive memoranda with the goal of providing economic relief to individuals and families.

One of the memoranda instructs the Treasury Secretary to defer payment of the employee-side Old-Age, Survivors, and Disability Insurance (OASDI) payroll tax. According to the president, the goal is to “put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.”

Unfortunately, it is unlikely this policy will achieve its intended effect. Trump’s payroll tax memorandum is poorly targeted to address the current crisis and introduces several potential administrative issues. Because of its faults, firms are unlikely to participate. The deferral will provide little benefit for workers and the economy.

Under current law, Social Security is financed by the OASDI payroll tax of 12.4%. This tax applies to the first $137,700 in wages and is split equally between workers and their employers, each paying 6.2%. The employee side of the tax is withheld from workers’ paychecks and remitted to the U.S. Treasury by employers.

The executive memorandum directs Treasury to pause the “withholding, deposit, and payment” of the OASDI payroll tax between Sept. 1, 2020, and Dec. 31, 2020. The deferral would only apply to workers that “generally” earn less than $4,000 bi-weekly or about $104,000 per year. The executive order also states that the Secretary of the Treasury will explore ways to ultimately forgive the liability, including legislation.

President Trump has advocated, even before the pandemic, for an employee-side payroll tax cut. The Trump administration argued that a reduction in the employee-side payroll tax would result in a larger economy by increasing the after-tax returns to work.

Most analysts concluded that an employee-side payroll tax cut is not the most effective policy to address the current crisis. Since March, millions of individuals have lost their jobs and, as a result, are no longer paying any employee-side payroll tax. Therefore, an employee-side payroll tax deferral would not provide out-of-work households with any direct relief. Additionally, while lower employee-side payroll taxes may increase the returns to work, it would have a limited impact on the labor force if there is a depressed demand for workers. Risk of exposure to the virus continues to depress demand for goods and services, which contributes to high levels of unemployment.

Due to concerns that it would be less effective than rebate checks, Congress ultimately rejected the proposal to cut payroll taxes as part of the next economic relief package.

The payroll tax deferral memorandum allows the Trump administration to work around Congress, but it suffers from its own shortcomings. In addition, it introduced several unanswered questions and potential administrative problems.

When the President signed the memorandum, it was unclear who was responsible for paying back the deferred payroll tax liability and when the deferred payroll tax liability would be due. Would a firm that pauses withholding starting on Sept. 1 be required to recoup the deferred tax from their workers in January? And if so, what happens if a worker leaves their job during the deferral? Or are workers ultimately responsible for the tax? Do workers need to write a check to the IRS for the payroll tax not withheld?

Some have also suggested that if individuals fail to pay back their deferred payroll tax obligation, it could expose firms to additional tax liability. This is because the amount of tax debt the employer pays on the worker’s behalf would be considered compensation and subject to payroll and income taxes.

It was also not clear what “generally less than $4,000 a month” meant and how a firm would determine eligibility for their workers.

Last Friday, the IRS released guidance on how employers are to administer the deferral. It states that employers, starting Sept. 1, can pause withholding employee-side payroll taxes until Dec. 31. Eligibility for workers is determined on a paycheck-by-paycheck basis, and firms will be required to recoup any deferred amount between Jan. 1, 2021, and Apr. 30, 2021. As such, firms would withhold twice as much during this period.

The guidance still leaves challenges for employers. Specifically, the guidance places the burden on firms to “make arrangements” with any worker that leaves the firm before the payback period. Given the potential pitfalls, it appears many firms will choose not to participate in the deferral. On Aug. 18, 2020, the U.S. Chamber of Commerce wrote a letter stating that the employee-side payroll tax deferral is “unworkable.” As a result, many companies would opt to continue to withhold and remit to the government as usual.

Ultimately, the payroll tax deferral amounts to a short-term loan to workers. The increase in after-tax wages between September and December may boost hours worked slightly and increase spending on goods and services (if they don’t save the additional income). That will be taken back early next year when take-home pay suddenly drops for workers. The small short-term benefit may be muted if very few employers end up participating.

Supporters of the payroll tax deferral argue that Congress could swoop in and forgive the deferred payroll tax liability to ease the concerns of businesses. If businesses were 100% certain Congress would ultimately forgive the liability, it would increase the likelihood they would participate. However, businesses and workers are unlikely to act on the promise that Congress could do something.

For at least the next few months, the U.S. economy will remain weak. Businesses and households require additional assistance. Trump’s payroll tax deferral won’t provide the assistance the economy needs.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Kyle Pomerleau is a resident fellow at the American Enterprise Institute (AEI), where he studies federal tax policy.