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Deferring Payroll Tax Due to Covid 19

On August 8th President Trump issued a memorandum deferring the payroll tax from September 1, 2020 through December 31, 2020. The deferral applies to employee wages and compensation totaling less than $4,000 in a biweekly pay period. 

However, this is only a deferral and not tax forgiveness. Employees would be responsible for paying this tax by April 30, 2021, as well as regular payroll taxes during the first months of 2021. As a result, employees will only see a temporary boost in take-home pay that would be offset by smaller paychecks in 2021 when the deferred payroll tax is collected. Any amount not repaid by May 1, 2021 would incur additional penalties, interest and taxes. 

President Trump stated that the payroll tax holiday was a “modest, targeted action that will put money directly into the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.” In deferring the payroll tax President Trump is hoping to jump start the struggling American economy by promoting additional spending and spur job growth. 

The memorandum also directs the Secretary of the Treasury to explore potential avenues, including legislation, to eliminate repayment of the deferred taxes. However, President Trump has promised that he will get rid of the deferred tax obligation if he is reelected. 

He has also promised to make permanent payroll tax cuts. “But if I win, I may extend and terminate. In other words, I’ll extend it beyond the end of the year and terminate the tax. And so, we’ll see what happens.” He did not specify how Social Security would be funded if the tax were eliminated. 

However, several questions remain about the impact and implementation of the payroll tax deferral. How will it affect seasonal workers and those that leave their current job before the end of 2020? Employers would still be required to pay the deferred payroll tax amount by May 1, 2021. Some worry that the tax will be taken from the employee's last paycheck in a large sum which would significantly impact take-home pay, especially for low wage workers. 

Another concern is how the tax deferral will impact Social Security, especially if President Trump makes permanent payroll tax cuts. Currently, employers and employees split a 12.4% tax to fund Social Security and a 2.9% tax to fund Medicare. The Social Security payroll tax is phased out for incomes above $137,700. If payroll tax cuts are made permanent it would lead to drastic changes in Social Security which is funded through these taxes. 

Millions of American’s depend on Social Security disability and retirement benefits for their livelihood. If the payroll tax cut was made permanent the chief actuary for Social Security, Stephen C. Goss, estimates that the trust fund for Social Security disability would be depleted by the middle of 2021 and the trust fund for Social Security retirement benefits would be depleted by the middle of 2023. 

In his testimony, Mr. Goss also stated that the current law governing Social Security funding “does not provide authority for the trust funds to borrow in order to pay benefits beyond the limited authority for “advance tax transfers.” This limited authority allows all payroll tax income expected for a month to be advanced to the beginning of that month if needed to meet benefit obligations on a timely basis. 

Thus, under this hypothetical legislation, benefit obligations could not be met after the depletion of the asset reserves and elimination of payroll taxes.” To maintain the solvency of Social Security, they are not allowed to borrow money to pay benefits and must maintain a large reserve of funds to continue paying benefits. However, if the payroll tax were terminated, this reserve would quickly be out of money without another funding source.