This past weekend, 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.” Without further clarification from the Treasury, it is unclear how businesses and the economy will react.
Under current law, Social Security is financed by the OASDI
payroll tax of 12.4 percent. This tax applies to the first $137,700 in wages
and is split equally between workers and their employers, each paying 6.2
percent. The employee side of the tax is withheld from workers’ paychecks and
remitted to the US Treasury by employers.
President Trump’s executive memorandum directs the Treasury
to pause the “withholding, deposit, and payment” of the OASDI payroll tax
between September 1, 2020 and December 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.
Most analysts have 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 cut would not provide out-of-work households with any direct
relief. Additionally, while lower employee-side payroll taxes may increase the
returns to work, they will have a limited impact on the labor force if there is
depressed demand for workers. Risk of exposure to the virus continues to
depress demand for goods and services, which contributes to high levels of
Without IRS guidance, it is difficult to gauge how businesses will react to and how the economy will be impacted by a payroll tax deferral. A pause in withholding may mean that workers see a boost in take-home pay in the last four months of the year. However, businesses may not pause withholding at all, leaving workers’ paychecks unchanged. Since, pending additional legislation, workers or their employers would ultimately be liable to pay the Treasury back in the future, a withholding pause could create administrative issues that businesses may want to avoid.
Supporters argue that Congress could swoop in and forgive
the deferred payroll tax liability to ease the concerns of businesses. However,
businesses and workers are unlikely to act on the promise that Congress could do something.
While there is some uncertainty, deferral of the payroll tax is unlikely to have the benefits its supporters suggest.