When Congress enacted the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), the goal was to provide flexibility to businesses during an unprecedented time. Section 2302 of the CARES Act seeks to provide flexibility by allowing businesses, and self-employed individuals, to defer payment of the “employer” portion of Social Security taxes.
CAUTION: This provision seeks to provide temporary liquidity to businesses and self-employed individuals. Any payments delayed must eventually be paid timely or you risk being subject to the Trust Fund Recovery Penalty; one of the largest penalties charged by the IRS.
Background of payroll taxes
Employers who pay wages to employees are required to withhold and deposit employment taxes. Employment taxes include the employee’s share of Social Security (6.2%) and Medicare (1.45%) taxes, and the employer’s share of the same. Self-employed individuals pay both the employee and employer share of employment taxes (15.3% combined). Social Security tax is collected on wages/self-employed earnings up to an annual maximum set by the IRS ($137,700 for 2020). Medicare tax is collected on all wages/self-employed earnings. When an employer is required to deposit payroll taxes it is a function of its total payroll and will vary from business to business. Self-employed individuals satisfy their deposit requirement via quarterly estimated payments.
What does the CARES Act offer?
Section 2302 of the CARES Act allows employers and self-employed individuals to defer the deposit and payment of the employer’s share of Social Security tax and certain railroad retirement taxes. The deferral applies to taxes that would normally be deposited during the period beginning March 27, 2020, and ending December 31, 2020(payroll tax deferral period).
Who can defer payment of the Social Security taxes under the CARES Act?
With one exception discussed next, all employers and self-employed individuals may defer the deposit and payment of the employer’s share of Social Security taxes. For employers, we’re awaiting guidance from the IRS on the mechanics (see the current FAQs). Self-employed individuals should consider adjusting their quarterly estimated payments for 2020.
Are there any exceptions to who can defer?
A necessary digression for a moment: at this point, our readers are very familiar with the Paycheck Protection Program (PPP) loans. If you’re not, you can find our 4-part series here (#1, #2, #3, #4). The PPP loans are so desirable because they have an opportunity to be forgiven. If a taxpayer has any portion of a PPP loan forgiven, the taxpayer is NOT eligible for the payroll tax deferral.
If I received a PPP loan, am I ineligible for this payroll tax deferral?
The devil is clearly in the details here and you’ll be happy with the answer! With so many businesses applying for the PPP loan with the intention of receiving forgiveness, many advisors thought the business became ineligible for the payroll tax deferral. However, the IRS issued FAQs on April 10 clarifying abusiness that receives a PPP loan may utilize the payroll tax deferral through the date the lender issues a decision to forgive all or a portion of the PPP loan. Upon receipt of such a decision, the business must cease deferring payment of the employer share of Social Security taxes.
When must I pay the deferred Social Security taxes?
The deferred Social Security taxes are due in equal installments (50% each) on December 31, 2021 and December 31, 2022. As the employer share of Social Security taxes is a deductible business expense, you should work with your advisor to determine when the taxes will be deductible based upon your accounting method and any additional future guidance issued by the Treasury.
How does this provision interact with the other available employer tax credits recently passed?
The Families First Coronavirus Response Act (FFCRA) introduced new paid leave credits and the CARES Act separately introduced the employee retention credit (blog coming soon). Generally, these credits are only available to specific taxpayers whereas the employer tax deferral discussed here is available to all employers. The IRS FAQs clarify a taxpayer may take advantage of the deferral while they determine the other available credits. The result will be when the taxpayer determines the deferred amount that must be paid, they will reduce it for any credits received.
If you need help determining how the CARES Act affects you or your business,call on us. In the meantime, continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the outbreak may affect your tax filing, payments, and planning. We encourage you to share the page with others. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.