Suspending the Payroll Tax By Executive Order Raises As Many Questions As It Answers

News reports indicate that President Trump is preparing to announce a payroll tax holiday by executive order. The White House has unsuccessfully sought to include the holiday in COVID relief legislation, and President Trump has hinted that he would proceed by executive order. But implementing such an action raises as many questions as it answers.

A payroll tax cut involves big dollars: employers and employees each pay a 6.2 percent Social Security tax (up to a certain amount) and 1.45 percent Medicare tax, with additional 0.9 percent tax on individuals who make over $200,000 (single) or $250,000 (married filing jointly). A total suspension would reduce federal revenue by $1.1 trillion per year ($1.3 trillion in reduced taxes on an annualized basis, offset by extra income tax revenue on the money taxpayers get to keep).

Strictly speaking, the president cannot unilaterally reduce or cancel payroll taxes. The last payroll tax holiday in 2011-12 was accomplished by Congress passing legislation. The President, however, can change payroll tax deadlines in some situations. Section 7508A of the Internal Revenue Code allows the Secretary of the Treasury to postpone tax deadlines for up to one year for people affected by a federally declared disaster. Treasury has already invoked the provision when it pushed the federal income tax deadline from April 15 to July 15 this year. An op-ed by Steve Moore and Phil Kerpen published on August 2 suggested using this provision to suspend payroll tax collection completely.

There are many potential legal challenges associated with a unilateral Presidential payroll tax suspension. Section 3101 of the Internal Revenue Code states specifically that the employee share of the payroll tax is on “every individual,” notwithstanding employers’ collection and payment responsibilities. Later, Section 3102(a) of the Code says that the tax is “collected” by the employer, and Section 3102(b) establishes that the employer is liable for transferring those amounts to the Internal Revenue Service. Taken together, it is not clear that these provisions establish the employer as the “taxpayer” for whom Treasury has authority under Section 7508A to extend tax deadlines.

Even if one assumes that the legal authority to suspend the payroll tax is clear, such an executive order creates a dilemma for employers because it would just postpone the due date of taxes, not forgive them. Under Section 3102(f)(2)-(3) of the Internal Revenue Code, any tax not collected by the employer shall instead be paid by the employee, with the employer owing penalties. Would employers just continue collecting the tax and paying it to the Treasury, instead of putting the tax obligation on their employees and risking IRS penalties for non-payment? If the Treasury refused payments (which would go beyond the powers granted by Section 7508A), would companies just hold on to the money rather than paying it out to employees in case they have to turn around and pay it to the government? If they do that, would that money being kept in trust do anything to boost the economy?

Moore and Kerpen propose that President Trump could pledge to sign a bill now or in January to forgive the amounts owed, letting employees off the hook for the payments and the employers off the hook for the penalties. But that would create its own challenges. Section 108 of the Code imposes income tax on the dollar amount of forgiven debts, raising the question of whether a forgiven tax is a form of debt forgiveness and therefore itself taxable income.

If companies pay out the money to employees, which is presumably what Moore and Kerpen are envisioning, that additional income would come with its own income tax and withholding responsibilities. Going back and adjusting withholding from months earlier is very difficult, with employers having to issue corrected W-2s and employees surprised by higher than expected tax bills when they file income taxes next spring. If the executive order suspends only the employee half of the payroll tax, while retaining the employer half, the employer half would actually rise since the employee’s income would go up thereby increasing taxes collected and remitted by businesses.

There are also significant questions about what would happen with the entitlement trust funds to which the payroll tax is devoted. In the 2011 payroll tax holiday, Congress replenished the foregone revenue with general fund transfers, but doing so takes an act of Congress and cannot be done unilaterally by the President. Moore and Kerpen suggest instead filling the trust funds with bonds, but the legal and practical details of such an action are murky at best. Without more clarity, the integrity of our already-ailing entitlement trust funds could be in serious jeopardy and would likely require additional interventions by the very same Congress that is being bypassed through an executive order.

Without detailed answers to some of these questions, employers might just steer clear of all of it by continuing to do what they’ve always done, blunting the desired economic impact of reducing taxes. A payroll tax delay or reduction might be worthy of consideration as a way to reduce the tax burden associated with employment, but its path would be infinitely clearer if it was mapped out by Congress in statute rather than in an executive order