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President Trump's executive order memorandum on payroll tax cut deferment explained.

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What are payroll taxes, and what does the President order do?

Payroll taxes consist of Social Security and Medicare taxes. Every pay period, an employee pays 6.2% of earnings toward Social Security and 1.45% for Medicare taxes. Workers pay the 6.2% Social Security tax on annual earnings up to $137,700.

Meanwhile, the employer pays the same rate per paycheck, adding up to a combined 12.4% Social Security tax and 2.9% Medicare tax.

In late March, the $2.2 trillion CARES Act said employers could defer paying their share of the Social Security tax from March 27, when the President signed the CARES Act, to the end of the year. They can pay back one-half of the sum by the end of next year and the second half by the end of 2022.

The new executive order puts workers’ 6.2% obligation on hold. But what does that mean in practical terms?

The median 2018 household income was $63,179, according to U.S. Census Bureau statistics. Suppose a hypothetical taxpayer made $64,000 before taxes. Slicing $64,000 into 26 paychecks paid on a biweekly basis comes out to roughly $2,461 per paycheck, pretax.

The 6.2% Social Security tax on that paycheck would be approximately $152. With two paychecks paid each month from September through the end of the year, that comes to a deferred amount of $1,220 — a hypothetical sum around the size of one stimulus check, albeit in smaller installments.

But the money is still a “long-term obligation,” Pomerleau said. At best, it’s an interest-free government loan, he said.

President has floated the idea of payroll-tax relief before. Freezing payment of employee-side Social Security taxes from September to the end of the year would result in $139.5 billion not going to government coffers, at least for the time being, according to an analysis last month from the Institute of Taxation and Economic Policy. The analysis applied the cap in which taxpayers pay 6.2% on their wages under $137,700, not the executive order’s $104,000 cap.

Payroll taxes brought in $914 billion for Social Security during fiscal year 2019, according to the Congressional Budget Office.

There is precedent for altering payroll-tax rules: In the rebound from the Great Recession, the past administration trimmed workers’ Social Security tax to 4.2% in 2011 and 2012.