What you Need to Know about the Social Security Payroll Tax Deferral Program

September 17, 2020

We’ve received some questions about President Trump’s executive order August 8 to defer employee payroll taxes to provide economic relief in response to the COVID-19 pandemic. Generally, many companies, large and small, are not participating in the program, while federal government employees and those in the military are. 

The President’s plan lets employers stop withholding the employees’ 6.2% Social Security tax as of September 1 for most workers and requires the employees to pay the deferral back early next year through additional payroll withholding. Hence, it gives employees a bump in their take-home pay in the short-term but an IOU down the road. The deferral is available through December 31 for workers making under $104,000 annually. For example, someone making $40,000 a year (the median wage in 2019) could defer $827 in payroll taxes in 2020 if their employer opts into the program. The $827 would need to be paid back in early 2021 through additional payroll withholding.

Some of the nation’s largest employers – including CVS, Wells Fargo, JP Morgan Chase, Costco and Home Depot say they won’t be participating. The CVS spokesman, for example, said that they felt it was not in their employees’ best interests to get a little more money now and have an obligation due in early 2021. Wells Fargo similarly didn’t want to create a future financial burden for employees.

Federal executive branch employees and military – service members will be participating. Their pay will be increased by the 6.2% FICA amount for the balance of 2020.  Employees don’t get the option to participate or not- if their employer participates, then the employees must do the same and vice versa. If an employee didn’t want to have the deferral, they can certainly put the additional money they receive into a savings account and use it in early 2021 to balance their budget when their paychecks will have “double withholding.”

Similarly, if you’re a federal employee who is locked into the deferral or you are employed by a private company that’s enrolling its entire workforce into the tax holiday, you need to budget now to avoid a cash shortfall in 2021. People who recognize it may be an issue in 2021 may want to set aside more money for next year. 

Citigroup, Walgreens, KPMG and other larger employers have declined to say whether they would participate in the deferral program. Dozens of other large employers ranging from private sector companies to state and municipal governments also seem to be lukewarm. One of the concerns these organizations have expressed is that, if they participate, then they might have difficulty explaining lower paychecks to their workers in the new year. Also, if employers participate and their employees leave or are terminated at the end of 2020, the employer will be responsible for repaying in 2021 the employee payroll taxes deferred in 2020.

The lukewarm response limits the broader potential economic impact of the tax deferral. If all full-time American workers (roughly 125 million) each deferred (on average) $827 in payroll tax withholding, that could have meant $100 billion extra in paychecks between now and December 31. Of course, any deferral now must be repaid in early 2021. The participation by the federal government workforce (2.1 million) and the military (1.3 million) might generate about $3 billion in current payroll tax deferral.  Of course, it is impossible to say how much of the tax deferral will be spent and how much saved. For example, about 20% of the $1,200 stimulus checks sent out in April went to savings. And, there was no repayment required there.

In conclusion, participation in the program is determined by the employers, not the employees. Second, based on current reporting of likely participation, it doesn’t look like the program will have a huge impact on the economy in 2020 or 2021.