Estimated payroll tax deferral by household income bracket

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President Donald Trump issued an executive order last week that would pause federal payroll tax obligations for many Americans as the economic consequences of the pandemic continue. The order defers the withholding, deposit, and payment of payroll taxes from the first day of September through the end of December. What does this mean for Americans?

What is payroll tax and who does the order affect?

Although payroll tax applies to both employers and employees, the recent executive order focuses on the share that workers pay directly. Individual payroll tax includes a 6.2% tax on wages for Social Security and a 1.45% tax for Medicare. The planned deferral only applies to the Social Security portion of the tax and specifies that eligible participants must make less than $4,000 in a biweekly pay period, or about $104,000 per year.

Even then, the impact will vary. The deferral will not affect those who do not have salaries to tax, like the unemployed or retired. The amount deferred will also be larger for eligible Americans who receive higher wages and so would otherwise pay more in taxes. The nature of the wage cap — which restricts the deferral to people making less than $104,000 — is also important. Because it considers individual earnings rather than household income, all earners who make less than the stated amount can participate, regardless of the salaries of the rest of their household.

Still unclear is whether employers must release planned withholdings to employees right now, as well as when or if participating Americans will need to pay the deferred taxes. Unless additional legislation forgives the taxes, the initiative will act similarly to an interest-free loan.

How much is the payroll tax deferral?

Internal Revenue Service data on tax returns indicates that individual payroll tax represented 12% of total taxes, or $3,965 for the average American household in 2018. The amount of taxes deferred will be less than that because of the four-month time frame, the focus on just the Social Security share of the tax, and eligibility restrictions.

Adjusting for this, the estimated value of deferred taxes for the average household will be $520. With almost 150 million taxpaying households in the US, this means that the order will delay $78 billion in government revenue. Breaking the data down by household income bracket further reveals that higher earners will feel the effects more than other Americans, with those in the upper middle class standing to benefit the most. The average value of deferred taxes per household for that group could be as high as $1,197, compared to $26 for those in the bottom 20% of income earners and $127 for those in the top 1%.

Compared to the $2 trillion CARES Act passed by Congress, this executive order is likely to impact a narrower set of Americans. Explore other coverage for more information on the broader economic response to the pandemic, including stimulus checks, the Paycheck Protection Program, unemployment insurance, and monthly government spending numbers.

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