In response to the economic impact of the COVID-19 outbreak, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. Among many different types of loans and incentives, the CARES Act introduced tax relief for businesses in the form of payroll tax credits, enhanced net operating loss (NOL) deductions, and payroll tax deferment. However, the payroll tax deferral section of the CARES Act raised several questions for small and medium-sized businesses, especially those that received loans from the Paycheck Protection Program (PPP).
To help answer these questions, the IRS released guidance on April 10, 2020, regarding payroll tax deferrals. Here’s what business owners need to know when it comes to paying taxes on social security this year.
What deposits and payments can employers defer?
Section 2302 of the CARES Act enables employers to defer certain payroll taxes, specifically the employer contribution of Federal Insurance Contributions Act (FICA) taxes, otherwise referred to as the employer’s portion of social security taxes. Typically, employers are required to pay 6.2 percent of social security taxes for each employee’s covered wages on a semi-weekly or monthly basis.
The deferral applies to deposits and payments of the employer’s share of the 6.2 percent social security tax owed for 2020. Without the CARES Act, this tax would have otherwise been required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. There is no dollar cap on the total amount of an employer’s social security taxes that can be deferred.
It’s important to note that the CARES Act does not cover other payroll taxes, such as the Medicare tax (1.45 percent) or the employee’s share of the social security tax. The CARES Act does, however, outline tax deferrals in an equivalent amount for self-employed individuals subject to the Self Employment Contributions Act (SECA) and employers and employees subject to the Railroad Retirement Tax Act (RRTA).
When are deferred tax payments due?
In order to avoid penalties, the deferred payments of the employer’s share of social security tax must be deposited by the following dates:
- On December 31, 2021, 50 percent of the deferred amount must be paid.
- On December 21, 2022, the remaining amount must be paid.
Who is eligible to defer tax payments?
All employers, regardless of size, may defer the deposit and payment of the employer’s share of social security tax. However, employers who received PPP loans become ineligible to continue deferring tax payments after receiving notice from the lender that the loan is forgiven. The Small Business Administration (SBA) says “the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities” if you are able to maintain your workforce.
For payments deferred through the forgiveness date, employers may continue to defer payments until the end of 2021 and 2022 as described above without incurring penalties for failure to pay. The CARES Act also states that employers who have had a loan forgiven under the U.S. Treasury Program Management Authority are also ineligible to defer payments.
Do employers need to make special elections to defer tax payments?
No, employers do not need to make any special elections to defer deposits and payments for payroll taxes. The IRS will revise the Employer’s Quarterly Federal Tax Return (Form 941) for the second quarter (April through June 2020). The IRS says information will soon be released regarding deposits and payments otherwise due on or after March 27, 2020, for the first quarter (January through March 2020).
Contact us if you have any HR or payroll-related questions on how to keep things running smoothly through this transition.