Article written by:
Tyler Gabalski, CPA
The Coronavirus, Aid Relief and Economic Security Act (CARES Act) introduced the opportunity to defer certain employment tax deposits and payments on wages paid through December 31, 2020. The introduction of this provision was in an effort to delay some tax payments as businesses endure the fallout of COVID-19.
How does it work?
Employers are not required to deposit or pay the employer’s share of social security tax that would otherwise be due between March 27, 2020 and December 31, 2020. Employer’s share of social security tax is equal to 6.2% of wages up to the wage base ($137,700 in 2020). The deferral of deposits and payments does not exempt a taxpayer from filing payroll tax returns. Form 941, Employer’s QUARTERLY Federal Tax Return, is still required to be filed for each quarter during 2020. Following the end of the deferral period of December 31, 2020, employers will be required to repay the deferred taxes over a two-year period. In order to avoid penalties, 50% of the deferred amount must be paid by December 31, 2021. The remaining deferred amount must be paid by December 31, 2022.
What is the benefit?
As businesses navigate the new climate due to COVID-19, most are looking for opportunities to improve cash flow. The deferral of certain employment taxes offers both the opportunity to improve short-term cash flow and reduces the current payroll expense per employee.
Who is eligible?
All employers are eligible to defer the deposit and payment of the employer’s share of social security tax. There is no dollar cap on the wages that are counted in calculating the taxes that can be deferred. Additionally, self-employed individuals may defer payment of 50% of social security tax on net earnings from self-employment income.
Does an employer receiving a PPP loan impact eligibility for employment tax deferral?
Employers who have received a PPP loan that has not yet been forgiven may defer certain employment taxes as explained above. Based on the current law, once an employer receives a decision that part or all of a PPP loan will be forgiven, the employer may not defer additional payroll taxes after the debt forgiveness date. The amounts that were deferred prior to the PPP loan being forgiven will continue to be deferred until the repayment dates – one half by December 31, 2021, and the balance by December 31, 2022. This could provide immediate cash flow for the business, especially since forgiveness under a PPP loan may not occur until late summer, early fall of this year (and potentially even further out if the current proposals to CARES Act amendments are passed).
Please note that as of this time, a proposed bill is in the works that would allow PPP loan recipients to defer payment of payroll tax even after the forgiveness date. If passed, it could provide additional cash flow to businesses that received PPP loan funding.
Will deferral of certain employment taxes impact an employer’s 2020 income tax returns?
This will depend on each taxpayer’s situation, but in general, the IRS Regulations provide that taxes are not deductible until they have been paid, regardless of the taxpayer’s method of accounting.
Like many programs and opportunities that have been introduced recently, proper implementation of employment tax deferral may be challenging. Your GBQ professional is here to assist you in implementing and exploring opportunities that may be available to your business.