On August 8, 2020, President Trump issued an executive order that allows for the deferral of the withholding and employer remittance of the employee share of Social Security tax (6.2% of wages up to $137,700 and the comparable portion of the Tier 1 Railroad Retirement Tax (RRTA) effective September 1, 2020, and through December 31, 2020. The deferral is available only to employees earning less than $4,000 each biweekly payroll period, or $104,000 per year.

Employers and employees will not be able to take advantage of this deferral option until the Secretary of the Treasury issues implementing guidance, as directed under the executive order.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act gives employers the option of deferring payment of the employer portion of Social Security tax (and the comparable RRTA tax) for the period March 27, 2020, through December 31, 2020, with the deferral to be repaid at 50% by December 31, 2021, and the remaining balance by December 31, 2022.

It is unclear if employees will need to opt into the withholding tax deferral as employers do under the CARES Act and, if they do, when the deferred amounts must be repaid. It is likely the President hopes that repayment will not be necessary because the executive order also directs the Secretary of Treasury to explore avenues, including legislation, that would eliminate the obligation that employees repay this Social Security tax deferral.

The President first signaled his interest in a payroll tax holiday as early as August 2019; however, Congress did not include the provision in its first three rounds of COVID-19 relief. This executive order comes as Democrat and Republican leaders reach an impasse on the contents of a fourth relief bill.

Payroll tax cuts under President Obama

There is some recent precedent of relieving workers of their Social Security tax obligations as a temporary measure for economic relief; however, legislation was the vehicle for that action.

To create economic stimulus in response to the recession that triggered in 2008, President Obama stewarded two provisions through Congress that put a portion of workers' Social Security taxes back into the economy. It is emphasized that both provisions had no adverse impact on the Social Security trust fund because they were funded by general revenues.

• The Making Work Pay tax credit. For 2009 and 2010, a refundable tax credit of $400 was available to working individuals and $800 to working families. The credit was calculated at a rate of 6.2% on earned income for 2009 and 2010 and phased out for taxpayers with adjusted gross income over $75,000 ($150,000 for married couples filing jointly). Employers delivered the credit to their employees by reducing their federal income tax withholding by the amount of the credit as computed for the periodic wage payment. Any portion of the credit that was not delivered by the employer through payroll checks as of December 31 could be claimed by eligible taxpayers on the Form 1040.
• Social Security tax cut. In 2011 and 2012, the Social Security tax rate that applied to employees and self-employed individuals was reduced by 2.0% but employers were subject to the full 6.2%.

Ernst & Young LLP insights

This executive order is likely to face court challenge under claims by some lawmakers that the President has exceeded his constitutional authority. Speaker of the House Nancy Pelosi (D-CA) told Fox News Sunday on August 9, 2020 that she agreed with Senator Ben Sasse's (R-NE) statement that the executive order amounts to "constitutional slop."

It is possible that this executive order will have served no purpose other than to ignite lawmakers on both sides of the aisle into agreeing that a payroll tax holiday should be part of their next COVID-19 relief package.

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