Congressional Research Service IN11260 (COVID-19 Economic Stimulus: Business Payroll Tax Cuts)

Summary

CRS Insight IN11260, COVID-19 Economic Stimulus: Business Payroll Tax Cuts, by Molly F. Sherlock and Donald J. Marples, Specialists in Public Finance, dated March 20, 2020. It examines payroll tax cuts for businesses as a form of economic relief during the coronavirus disease (COVID-19) outbreak. It explains that the Social Security (OASDI) tax equals 6.2% of wages up to $137,700 in 2020 for both employers and employees, and that each also pays 1.45% for Medicare Part A. The Insight notes that employers generally deposit payroll taxes semiweekly or monthly and that, because nonprofits and government employers also pay payroll taxes, relief delivered this way may reach nonprofits that do not benefit from income tax cuts.

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                                                                                                INSIGHTi



COVID-19 Economic Stimulus: Business
Payroll Tax Cuts

Molly F. Sherlock
Specialist in Public Finance

Donald J. Marples
Specialist in Public Finance

March 20, 2020
The economic fallout from coronavirus disease (COVID-19) has accelerated rapidly. Policymakers
continue to evaluate tax policy economic relief options. Payroll tax cuts for businesses are one option that
would provide economic assistance to business activities.

Business Payroll Taxes
Payroll taxes are collected to finance certain entitlement programs, including Social Security, parts of
Medicare, and Unemployment Compensation (UC). Social Security’s old age, survivors, and disability
insurance (OASDI) payroll tax is paid by both employers and employees, and it finances the Social
Security trust funds. The tax equals 6.2% of wages on the taxable earnings base ($137,700 in 2020). This
tax is paid by both employers and employees (with self-employed individuals paying both the employer
and the employee share, or 12.4%). The primary source of funding for Medicare Part A is a separate
payroll tax paid by employers and employees. Each pays a tax of 1.45% on the employee’s earnings; the
self-employed pay 2.9%.
Employers typically deposit payroll taxes with the Internal Revenue Service semiweekly or monthly, and
report employment taxes paid on quarterly federal tax returns filed no later than 30 days after the end of
the calendar quarter. Some employers with small payrolls may file annually.
Employment payroll taxes generally are paid by all types of employers: businesses, nonprofits, and
government employers. Thus, tax relief that is provided through payroll tax reductions may be available
to nonprofits, which generally do not benefit from income tax reductions.
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If maintaining Social Security or Medicare Part A trust fund balances is a policy objective, these funds
can be made whole through a transfer of general revenue. In this case, the revenue loss from a payroll tax
cut would add to the deficit, but not decrease amounts available for Social Security or Medicare benefits.
Temporary cuts to payroll taxes enacted in past recessions have protected trust funds from any impact in
such a manner.

Options for Payroll Tax Cuts
There are a number of options for how to structure and implement payroll tax reductions. The Relief for
Individuals, Families, and Businesses portion (i.e., Division B) of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act (S. 3548) proposes a payroll tax deferral for employers. Employers and
self-employed individuals would be able to defer, or postpone, the employer share of the Social Security
payroll tax. Deferred tax liability would be paid in two installments: one due by December 31, 2021, and
the second by December 31, 2022. The Social Security trust funds would not be affected.
Another option is to provide a payroll tax rebate. This option would return 2020 payroll taxes already paid
by employers. It could be targeted to small businesses, with small businesses identified using an
employee threshold, a gross receipts threshold, or some other measure. A rebate could be capped at a
fixed amount per employee, or given for a certain number of employees. A payroll tax rebate could also
apply only to businesses who have been ordered by federal, state, or local government officials to cease
operations due to COVID-19, or these types of businesses could be given a larger rebate. A payroll tax
rebate payment could improve cash flow, helping businesses with limited financial resources. Depending
on how the policy was designed, a portion of the lost federal revenue may also support employers whose
business activities were unaffected by the COVID-19 economic shock.
A third option is to suspend business payroll taxes (provide a payroll tax holiday). The Trump
Administration has expressed interest in this option. The business community has also expressed support
for a payroll tax suspension. How long the payroll tax would be suspended is one policy choice. It could
be suspended for three months, for the rest of the year, or for some other period of time. There is also the
question of whether employee payroll tax collections would be suspended entirely or instead reduced by
some amount (e.g., reduced by two percentage points). Suspending payroll taxes would reduce the cost of
keeping employees on the payroll, and thus could promote worker retention. A payroll tax suspension
only helps employers with paid employees; if an employer has already been forced to lay off its
workforce, a payroll tax suspension will not provide financial assistance.

Past Experience and Potential Effectiveness
Employer payroll tax cuts have been enacted in the past. The Hiring Incentives to Restore Employment
(HIRE) Act of 2010 (P.L. 111-147), enacted during the Great Recession, suspended the employer’s share
of the 2010 payroll tax (6.2% of the worker’s earnings) for qualified workers (generally unemployed
individuals) hired between February 3, 2010, and January 1, 2011. The policy was estimated to reduce
federal revenue by $7.6 billion. One difference between the past policy and the current proposals is that
the past policy was intended to spur hiring; current proposals have the goal of preventing layoffs.
The provision’s effectiveness will depend on how the additional cash flow is utilized. According to CBO
models run during the Great Recession, an employer payroll tax reduction would provide a small
incentive to increase employment or hours worked. The empirical literature generally agrees with the
results from the CBO model, finding that during economic turmoil businesses are prone to favor holding
cash or reducing debt over making investments (Eisfeldt and Muir 2016, Bolton, Chen and Wang 2013,
and Dobridge 2016). The last study also found that the use of refunds to improve a firm’s cash flow
reduced the firm’s bankruptcy risk and the probability of a future credit-ratings downgrade. One caveat to
Congressional Research Service                                                                                3




this empirical literature is that those studies examined a different cash flow incentive—net operating loss
carrybacks—that would be equivalent to a payroll tax refund.




                                         IN11260 · VERSION 1 · NEW
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