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The Mechanics of President Trump's Payroll Tax Deferral Memorandum

Defer payroll taxes till December 31, 2020, and forgive them if Trump wins re-election.

|The Volokh Conspiracy |

Earlier today, I shared my tentative thoughts on President Trump's four new executive actions. My first post in this series considered the mechanics of the Memorandum on Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus Disease 2019.

This second post will look at the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.

Earlier this year, the Trump Administration extended the deadline to file federal income taxes from April 15 to July 15, regardless of the amount owed. I have not researched whether this move was lawful. (I filed before April 15.) I am also not aware of any legal challenges to this extension. I can't imagine any group would be willing to go to court to force people to pay taxes earlier, as well as suffer additional penalties and late-payment fees.

This second memorandum extends a tax deadline, but on a much larger scale. Trump directs "the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need." What exactly is being deferred?

The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020, subject to the following conditions.

I do not know enough about the technical aspects of how this process would work. Does this mean that the Treasury Department will not allow employers to withhold the taxes? If an employer tries to transmit these withheld taxes, will the Treasury Department not allow it to be deposited or paid? Must the employer hold on to the money? Can the employer hold on to this money? Right now, HR lawyers are flipping out. They have till September 1 to figure out the details. And the policy terminates on December 31. President Trump, or President Biden, will be forced to decide whether to continue this program.

The memorandum applies to people who earn less than $4,000 on a bi-weekly basis, pre-tax. That breaks down to about $100,000 a year. A considerable number of people will benefit from this policy.

Of course, deferring a tax doesn't mean it never has to be paid. Trump takes certain actions to address that fact. First, "amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax." In other words, people can pay the taxes later, without penalty. (The IRS took similar actions when it pushed Tax Day till July 15).

But most people are not going to save the money for an eventual tax bill. There is a reason why even Milton Friedman supported tax withholding. People are not sad to see money go that they never had. In college, I heard Walter Williams give a talk. He proposed that we could reform tax policy overnight if every American was forced to go the post office, every two weeks, to personally pay his taxes.

Next, Trump's memo offers a tease:

The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.

During his press conference, Trump said (and I am paraphrasing), if I am re-elected, maybe I will forgive the taxes. Like a forgivable loan! In other words, people would never have to pay it! What is Biden going to say during a debate? No, I will not forgive it, and I will force everyone to pay the back-taxes with penalties and interest. That answer would be insane.

The greatest risk here is for employers. I wrote about that risk earlier:

One final note. The biggest losers today are employers. Will corporations actually stop withholding payroll taxes? Sure, Trump approved that action. But federal law remains in place. Will any compliance department actually stop withholding payroll taxes on the promise of an executive action? A Biden administration could prosecute these companies. Thus, employers will now be at odds with their employees who demand their full salary. Perhaps an employer would be a good litigant to challenge this executive action, as there is no regulatory uncertainty.

Again, I haven't researched the specific statutory authorizations carefully. Please email me if I flubbed the mechanics.

The third memorandum, concerning student loan interest, is fairly straightforward. And the fourth order, concerning foreclosures, does not take any action. It merely directs others to consider actions.

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41 responses to “The Mechanics of President Trump's Payroll Tax Deferral Memorandum

  1. As I stated in a reply to an earlier post, the Congress will with near certainty forgive the tax for both the employer and employee in early 2021. It is a political necessity.

    As for the issue that Trump could unilaterally forgive the tax, well that would seem to be legally impossible, but then who would protest?

    This is where we need the Rand Paul’s of the world.
    And what about this idea of requiring the states to kick in $100 per week in extra UI? How is that legally possible?

    And why is it that Trump can take these unilateral actions with no opposition from conservatives, but when something is done the right way, by congressional action, in the case of requiring states to accept Medicaid expansion that is considered an unconstitutional action? Conservatives need to apply their beliefs consistently, or else we are just regarded as opportunistic quacks.

    1. I don’t see how he’s got the power to do this, legally speaking, but I’d say the same of DACA, for precisely the same reasons.

      It’s “just” prosecutorial discretion, right?

      1. Exactly. Roberts and the Dems (but I repeat myself) made the rules. Trump is just following them.

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  2. Responsibility is now pined on Trump for aid being both too much and not enough. By November it will be time for plan B(iden).

  3. I expect that Trump’s actions are a signal for Congress to get the finger out and do something.

    1. Have you met Congress? They haven’t passed anything that wasn’t a tax cut or renaming a post office since ACA.

    2. So if Congress doesn’t act, that authorizes the President to take action? I was a poli sci major and taught that subject for 25 years. I don’t recall that being how our government is supposed to work.

  4. “There is a reason why even Milton Friedman supported tax withholding.”

    Yes, and it was a bad reason: To keep people from immediately revolting in the face of high taxes, by never letting them have the money in the first place.

  5. Won’t this also ensure debt ceiling brinkmanship before the election since there will be almost no federal revenue in the next few months?

    1. “Almost no federal revenue”? Surely you jest. I doubt anyone is that naive.

      1. Almost none is a bit hyperbolic. At nearly 50%, personal income tax is the largest source of revenue. Without withholdings, that revenue would be delayed until next April.

        Other sources like payroll taxes and corporate taxes probably aren’t doing great either.

        1. So is 50%. Try 1/3.

          1. That chart is for federal, state, and local combined.

            The same source says that 2.1T of 3.7T (57%) federal revenue is from the income tax. But, that includes payroll taxes. https://www.usgovernmentrevenue.com/fed_revenue_2020USri

        2. At nearly 50%, personal income tax is the largest source of revenue. Without withholdings, that revenue would be delayed until next April.

          The language in the memo isn’t a model of clarity, but I’m fairly comfortable that the intent is for the deferral only to apply to the FICA portion of withholdings, not the federal income tax portion. That’s a fairly small portion of the withholding revenue stream.

          1. You are right. It only requests that the taxes in 26 U.S.C. 3101 should be ignored. That covers FICA bit not general income tax. I saw “withholdings” and assumed income tax withholdings instead of payroll tax withholdings.

          2. So it’s “only” Social (in)Security that is supposed to keep paying out with no revenue coming in…

  6. Prosecutorial discretion.

  7. On this one, I can speak to previous practice, as I am an experienced tax professional. IRS has the statutory power to extend its filing deadlines, and in some cases its payment deadlines, to accomodate the victims of presidentially declared disasters. There are typically at least one of these every year — hurricanes, wildfires, earthquakes etc. IRS took advantage of this to extend its filing deadline to July before Congress even acted. The CARES act enabled IRS to extend the payment deadline as well. More such extensions are possible depending on how long the state of disaster lasts.

    1. I don’t think Trump’s IRS (if he’s still president then) will be so solicitous.

  8. Back in high school, when my father told me, “If you’re making $200 a week, you’re doing pretty good,” he advocated as much withholding as possible. “It’s just like saving money.” Working class wisdom. Still exists with the black working class, at least.

    1. Then your father was an undisciplined fool. Loaning the government money at 0% interest is a fool’s game.

      As for your classist and racist comment, how about some citations to back it up?

      1. I believe the correct response is “F—k you and the horse you rode in on.”

        1. Your father’s “advice” is so obviously wrong that I took your comment to be saying that this particular “wisdom” is reflective of the kind of economic ignorance that keeps people from accumulating wealth and leaving the “working class”. Were you actually trying to say that your father was right (either on the bottom line that withholding as much money as possible is good, or on his description of doing so as being “just like saving money”)?

          1. I up my withholding beyond the bare minimum for a couple of reasons.

            1) I am willing to pay a small fee for the enjoyment I get from a decently sized lump-sum when I file. Non-optimal economic behavior can be fun.
            2) I don’t resent a marginal increase in the amount I’m giving to the government in taxes as much as I do similar amounts via other methods or to other entities.

          2. Comfortable people like you, who have no problem paying a big lump-sum tax bill in April, have no idea what I’m talking about.

      2. I agree with your comment that loaning the government money at 0% is foolish and I loan as little as possible and accept that I will have to pay extra (above money withheld) on April 15th. I can do that because I have enough money that paying several thousand dollar is not a problem. For the average young person the idea of paying $2K to $3K on tax day will be had to swallow. Most people prefer a refund and see it as extra/mad money (it not of course).

      3. Yes, put that money in a bank and you get 1% interest. That’s so much better than 1%.

  9. Before the 2016 election I was weary of candidate Trump because of his business practices. These typically benefited him and not others (I don’t recall anyone testifying that Trump made them richer). I can not help but see this in his Presidency. Trump has always made money for himself and left a trail of wreckage for others. I do worry that these action fall into that category and that is undercutting the American economy.

    1. “Trump has always made money for himself…:” That is spoken by someone who doesn’t know Trump’s history as a businessman. He’s declared bankruptcy 6 times. He was an enormous failure as a businessman.

      1. Declaring bankruptcy is a financial and business tool, nothing more.

      2. Trump came out well on those bankruptcies. He did not lose money, his investors, his creditors lost money. My concern is that the USA will end the same way. President Trump will leave office with a wrecked economy. Will not hurt him and the rest of us will be left with the debt and the mess.

      3. 6 of several hundred Trump businesses went into bankruptcy. That’s a remarkably good record compared to most businessmen.

  10. I don’t understand how this even works. Section 3102 of the IRC requires, among other things, that “[t]he tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid.” The clearest problem is with employees who work for the employer now, but are no longer working for the employer when the extension of time ends. How exactly, or even approximately, does the employer “deduct” the amount of the tax from the wages paid, which have been, um already paid in full? I’m not even sure that it works linguistically for employees who have stayed with the same employer, though I suppose that’s a closer case.

    1. I don’t understand how this even works.

      Same way DACA worked: the executive branch simply refuses to enforce the law. Furthermore, based on DACA precedent, Biden can’t simply reverse the policy.

    2. Not that hard to understand. Income tax is your personal responsibility. You employee deducts payments on the taxes with each paycheck, essentially an installment. Taxes are due April 15th and you pay them at that time. If the amount deducted from paycheck exceeds you taxes you get a refund, if not you pay in the remaining amount. What you can expect from the President’s actions is that you will get more now but next April 15th (after the election) you will get the tax bill. Don’t expect a refund and be ready to make a payment on April 15th.

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  12. Is it $100,000 a year from this year or last? That’s what I’m trying to figure out. My business took off last year and I made just over $100,000. Then they made it illegal for me to work. No stimulus check. No nothing. I had to sell stocks (at a loss) just to pay bills one month. They don’t seem to have considered someone in my situation. I just wanted to work.

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