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.