Just Taxes Blog by ITEP

Trump’s Executive Order on Social Security Payroll Taxes Is a Mess 

Trump’s Executive Order on Social Security Payroll Taxes Is a Mess 

August 17, 2020

Steve Wamhoff
Steve Wamhoff
Director of Federal Tax Policy

President Trump’s executive order that would supposedly allow workers to delay paying Social Security taxes, along with his related public statements, have created a situation that is bizarre even by 2020 standards.

On one hand, the president has not provided a tax cut because he cannot do so without Congress’s cooperation. He may claim he is providing a tax cut, but it is actually a tax deferral. On the other hand, his promise to, if reelected, enact legislation to let workers keep the money would fail to help those who most need help (because it would not benefit the unemployed), fail to provide help when it is most needed (because it would not provide help right now as other aid dries up) and blow a hole in the Social Security program’s finances.

One possibility is that the executive order would change almost nothing, which is usually the best outcome of any initiative under the Trump administration. On the surface, it allows for deferral of the 6.2 percent Social Security tax that workers pay on their wages, from Sept. 1 through the end of the year. (The 6.2 percent that employers pay toward Social Security is already deferred under a provision of the CARES Act.) The executive order allows this for workers who make up to $2,000 a week which comes to about $104,000 a year.

But while this tax is paid by workers, it is withheld from them by their employers, who are responsible for sending it to the IRS. Employers can opt out of what the president is offering and instead collect the tax and forward it to the IRS as usual because the complexity of changing their withholding outweighs the benefit. And the benefit is small given that the tax would be due at some still-unspecified point in the future.

Part of the problem facing employers is that they are usually responsible for providing the money to the IRS whenever it is due. If companies stop withholding the tax for the rest of this year, what happens when the tax comes due? How would employers get that money back from their employees? Will employers increase withholdings at some point next year to include four months’ worth of tax? And how would a payroll administrator retrieve that money from workers who have left their company?

Another possibility is that some employers could decide to delay forwarding the tax payments to the IRS but still withhold the tax from their workers. In other words, the deferral of the tax could provide some small benefit to businesses (basically an interest-free loan) without passing that benefit onto the workers. It is impossible to know without seeing IRS rules on the policy whether anything would prevent companies from doing this.

Still another possibility is that all these problems will be worked out and, somehow, workers really will be allowed to delay paying the 6.2 percent tax on their wages until sometime next year. Even in this scenario, the benefits to workers or the economy are almost non-existent. Are workers really going to spend the extra money, knowing that it must likely be paid back? Perhaps those facing a financial emergency would spend it–but remember that people facing the most common financial emergency (unemployment) receive nothing from this proposal.

But what if Trump is reelected and somehow, against all odds, the next Congress wants to enact his proposal to waive the deferred tax so that it does not need to be paid? After failing to provide help when it is most needed or to those who most need it, Trump would then provide a large tax cut that would reduce funding for Social Security.

This would not be the first time this has happened. Congress enacted a Social Security payroll tax cut during the last recession as a compromise between President Obama and Republicans, although that cut was much smaller. The real problem is that normalizing payroll tax cuts as a routine response to an economic downturn will allow cuts to Social Security’s funding to become more politically acceptable when it should not be acceptable at all.

And this is the bizarre situation Trump has created. He has simultaneously failed to provide a real tax cut while also threatening the finances of the program most important to people’s economic security.