COVID-19: Presidential Order Deferring Individual Payroll Taxes

COVID-19: Presidential Order Deferring Individual Payroll Taxes

INSIGHTi
COVID-19: Presidential Order Deferring
Individual Payroll Taxes
Updated January 6, 2021
On August 8, 2020, President Trump issued a presidential memorandum ordering the deferral of
individual payroll tax obligations from September 1, 2020, through December 31, 2020. The deferral was
for employees with biweekly compensation of general y less than $4,000. The memorandum directed the
Secretary of the Treasury to issue guidance to implement this policy. On August 28, 2020, guidance was
provided in IRS Notice 2020-65.
This Insight discusses the individual payroll tax deferral outlined in the memorandum, including issues
related to repayment of deferred amounts; compares this order to the business payroll tax deferral
provided in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136); and
addresses questions related to potential economic effects.
What individual payroll taxes were affected by the
order?
The presidential memorandum ordered deferred collection and payments of the employee portion of the
Old Age, Survivors, and Disability Insurance (OASDI) payroll tax, also known as the Social Security
payroll tax. The Social Security trust funds are financed by a 12.4% payroll tax on wages up to the
taxable earnings base ($137,700 in 2020). The tax is split equal y between employers and employees,
with each paying 6.2%. Self-employed individuals pay both the employer and the employee share, or
12.4%. The deferral was applicable to employees with less than $4,000 in wages during the biweekly pay
period (or equivalent amounts with respect to other pay periods). The deferral applied to the railroad
retirement tax attributable to the individual Social Security tax. The memorandum and IRS Notice 2020-
65 did not specify whether the deferral applies to self-employed individuals.
How did the order affect payroll tax collections?
Employers collect the employee portion of the tax by deducting the tax from wages when wages are paid.
Employers typical y deposit payroll taxes with the Internal Revenue Service (IRS) semiweekly or
monthly, and report employment taxes paid on quarterly federal tax returns filed no later than 30 days
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after the end of the calendar quarter. Some employers with smal payrolls may file annual y. Decisions
about withholding of employee payroll tax amounts, and thus decisions regarding participation in
deferral, are made by the employer.
Employee payroll taxes were deferred, not forgiven, by the presidential order. Deferring employee payroll
taxes resulted in the deferred tax liability being due after December 31, 2020. The presidential
memorandum did not specify how deferred employee payroll taxes are to be collected, but did direct the
Secretary of the Treasury to explore avenues to eliminate the obligation to pay deferred taxes, including
legislation. Permanent forgiveness would require congressional action.
Administrative concerns and issues not resolved in IRS Notice 2020-65 (described below) may have
limited the scope of employers opting to defer employee payroll taxes. When the deferral was announced,
stakeholders asserted it would have been unworkable to implement a system where employees choose
whether or not their employer would defer their share of OASDI payroll taxes from September 1, 2020,
through the end of the year. Employers also expressed concerns about administrative costs associated with
implementing the deferral and concerns about being liable for the deferred tax liability of employees who
have changed jobs. Another concern was that employers may be liable for deferred employee payroll
taxes if employees’ employment terminates before the end of the repayment period.
When are deferred taxes repaid?
Deferred payroll taxes must be repaid in 2021. IRS Notice 2020-65 provides that any deferred employee
payroll tax be withheld and paid ratably in the first four months of 2021, between January 1, 2021, and
April 30, 2021. A provision in the COVID-Related Tax Relief Act of 2020 (Division N, Title II, Subtitle B
of P.L. 116-260) extended the repayment period through December 31, 2021.
Deferred payroll taxes not repaid during this period are subject to interest and penalties. Notice 2020-65
provides that employers “may make arrangements” to collect deferred taxes from employees. The notice
does not, however, explicitly address how employers should handle the deferred employee payroll taxes
for employees no longer employed by the employer during the repayment period.
Federal government and military employees who had the employee share of their payroll taxes deferred in
2020 wil have deferred amounts withheld from their paychecks in 2021.
How does the individual deferral compare to the CARES
Act deferral for businesses?
The CARES Act contained a delay in payment of employer payroll taxes (as opposed to the employee’s
share of payroll taxes). Specifical y, the CARES Act deferred employer OASDI payroll taxes due between
March 27, 2020, and December 31, 2020. Deferred tax liability is to be paid in two instal ments—with
half of the deferred amount paid on or before December 31, 2021, and the remainder due on or before
December 31, 2022. For businesses, the payroll tax deferral was intended to free up cash flow. The
payroll tax deferral is similar to an interest-free loan, which businesses wil presumably repay once
normal business operations resume.
The CARES Act provides general revenue transfers to the Social Security trust funds in the event that the
employer payroll tax deferral results in a loss of revenue. The presidential memorandum does not address
how the employee payroll tax deferral might affect the Social Security trust funds, or specifical y include
any hold-harmless provision.

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Is the individual deferral likely to provide economic
stimulus?
There are likely limited economic effects from changing the timing of when individual OASDI payroll
taxes are paid. Delaying payroll tax liability for several months does not provide working individuals with
additional economic resources in the longer term; nor does it change the incentives to work, save, or
invest. Employees employed by employers choosing to defer payroll taxes could see increased take-home
pay in the near term. However, given the administrative concerns and other unresolved issues, employers
may have been hesitant to defer employee payroll taxes, which could mean limited economic effects.
Payroll tax deferrals do not provide additional resources to nonworking or unemployed individuals. If
deferred payroll tax liability is forgiven, the forgiveness of deferred payroll tax liability could provide
additional fiscal stimulus.
Barry Huston, Analyst in Social Policy, and William Morton, Analyst in Income Security, contributed to
this product.

Author Information

Molly F. Sherlock
Donald J. Marples
Specialist in Public Finance
Specialist in Public Finance

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