March 13, 2020

Trump Administration Seeks Payroll Tax Cut in Response to COVID-19 Outbreak

Holland & Knight Alert
Christopher J. Armstrong | Nicole M. Elliott


  • President Donald Trump is asking Congress to pass a payroll tax cut to help stimulate the economy amid the coronavirus (COVID-19) economic slowdown. A payroll tax cut reduces the amount of money withheld from employees' paycheck and results in an increase in take-home pay.
  • Congress has passed payroll tax cuts – most recently in 2011 and 2012 – in an attempt to stimulate the economy during a downturn.
  • Payroll tax cuts are costly and finding a way to compensate Social Security Trust Funds for the loss of revenue can be a difficult political process. Past payroll tax cuts have been paid for by fees attached to mortgages or from increased federal borrowing.

The Federal Insurance Contributions Act (FICA) imposes a tax on employee wages, and requires contributions from employers in order to fund Social Security and Medicare. Currently, the Social Security portion of FICA tax requires employers and employees each to pay 6.2 percent for the Social Security Trust Fund for wages up to $137,700. The Medicare portion is a 1.45 percent contribution by both employers and employees, with a potential additional amount for employees with higher incomes. These amounts are required to be withheld by employers, while self-employed individuals must pay them directly to the U.S. Department of the Treasury.

Payroll tax cuts, sometimes referred to as "payroll tax holidays," have been used in the past. Most recently in 2011 and 2012, under President Barack Obama, the employee (and self-employed) shares of the payroll tax that would have gone to the Social Security Trust Fund was reduced from 6.2 percent to 4.2 percent.

What Exactly Is the President Proposing?

In President Donald Trump's address to the nation on March 11, 2020, he called on Congress to provide "immediate payroll tax relief" in response to the negative economic effects of the coronavirus (COVID-19) outbreak. Although details are scarce on the proposal, many predict that the president is going to propose a reduction of the employees' portion of the FICA tax until the end of the year. A similar adjustment was made in 2011 and 2012. Some sources indicate that others are pitching a complete elimination of the employees' contribution of FICA taxes for the short term.

Does a Payroll Tax Cut Help the Economy?

This is where the reviews are mixed. Historically, payroll tax cuts were used to put more money in employees' paychecks as a way to generate economic growth through consumer spending in durable goods and the service economy. Such a goal does not necessarily align with the current message to practice social distancing and stay home if sick. Another criticism is that a 2 percent reduction only increases paychecks marginally, and would have little impact on those who are forced to take unpaid leave because of COVID-19.

The other important concern is cost. The seemingly small 2 percent reduction for the two-year period in 2011 and 2012 reduced federal revenue by more than $225 billion. This loss in revenue to the Social Security Trust Fund was made up from the General Fund of the Treasury, but the laws reducing employees' contributions also contained "pay fors."

The 2011 and 2012 reduction was in part paid for through a 10 basis points fee assessed on every mortgage that Fannie Mae and Freddie Mac helped finance from 2011 through present day. This additional amount translated into higher mortgage interest rates and means, until it expires in 2021, that the American public is still paying for the legislation.

Can the President Do This Without Congress?

No. The politics around a payroll tax cut are significant. However, Congress may be inclined to help if the right deal can be struck. House Democrats may insist that any payroll tax cut be conditioned upon federal legislation to mandate paid sick leave, unemployment benefits and other concessions. (See Holland & Knight's previous alert, "COVID-19: Where Things Stand in Washington, D.C.," March 11, 2020.) Budget-minded Republicans will insist that the payroll tax cut be offset and they will likely find support among Democrats as reducing money available for the Social Security Trust Fund is problematic for many. The likely suggestion for a pay for from the Trump Administration is a continuation of the 10 basis points fee assessed on mortgages. The housing industry and consumer advocates will likely oppose this fee on homeownership.

Holland & Knight will continue to monitor and update COVID-19 developments as necessary.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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