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Executive Order on Payroll Tax: Waiting For Guidance

Updated: Sep 26, 2022

On August 8th, President Trump issued an order which will allow employees to defer the withholding and depositing of the employee's share of the Social Security tax. This order is supposed to go into effect on September 1st. There are many questions remaining on how this program will work and we are awaiting guidance from the Department of the Treasury.

In news reports, they often refer to Social Security taxes as "the payroll tax". We find this description generic and quaint since wages in California and most other states incur eight separate, multi-part taxes. Social Security is just one of many payroll taxes. But, yes, this new order refers to just Social Security and none of the other payroll taxes.

As a reminder, Social Security is a tax levied on the wages of an employee. The burden of this tax is significant (12.4%), and is shared evenly by the employee (6.2%) and the employer (6.2%). The revenue from this tax is used to fund the Social Security benefit payments for those who are eligible to receive such benefits.

Over the four decades ABC has been in business, we have seen changes to Social Security taxation before. Most recently, in 2011, President Obama enacted a Social Security rate cut, which temporarily reduced the employee withholding rate to 4.2%. Social Security also has a subject wage limit, and most every year it increases. So, government altering Social Security parameters is not new.

However, this particular order presents some real operational challenges. I won't bore you with the details, but note it is a deferral, not a rate cut or forgiveness. This means the advantage may be minimal because the taxes will still be due, just later. President Trump has signaled his desire to ultimately forgive the tax, but for now this is uncertain and will require an act of Congress. The initial order has caused some concern in the payroll industry as we await details on the "nuts and bolts" of how this will work. The order requires the Department of the Treasury to issue guidance on how we will proceed. We are watching carefully for that guidance, but so far nothing has been released. We will update our clients as more information becomes available.

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