April 22, 2020 - You can’t watch the news or read a news article without hearing about the “Coronavirus Aid, Relief, and Economic Security Act” or ”CARES Act”, at least the more publicized parts of it.  One relief provision of the CARES Act that is in the news daily is the “Paycheck Protection Program” which provides loans for small businesses. Among all of the relief that the CARES Act provides there are some less publicized provisions that taxpayers can take advantage of. One of which is the deferment of paying a portion of payroll taxes. 

The CARES Act provides that employers may defer the deposit and payment of the employer's portion of social security taxes and certain railroad retirement taxes. The payroll taxes that can potentially be deferred are the “old-age, survivors, and disability insurance” taxes imposed by Internal Revenue Code Section 3111(a).  These taxes are equal to 6.2 percent of the wages for individuals that they have under their employment.  The taxes eligible for deferment are only these taxes that are payable during the “deferral period” of March 27, 2020 and ending before January 1, 2021.

If all deposits for the applicable employment taxes that were required to be made during the payroll tax deferral period are made by the “applicable date” the employer will be treated as having timely made these deposits. The ''applicable date'' is: (A) 50% of the deferred taxes will need to be paid by December 31, 2021, and (B) the remaining 50% of the deferred taxes will need to be paid by December 31, 2022.

Example: An employer who has one employee earning $5,000 a month ($60,000 annually) would be able to defer $310 a month for a total of $2,790 the next 9 months. 

$5,000 x 6.2% = $310
$310 a month x 9 months = $2,790

Therefore, $1,395 (50%) is deferred until no later than December 31, 2021 and the remaining $1,395 (50%) is deferred until no later than December 31, 2022.

The max deferral amount per employee is $8,537.40 (6.2% of wages up to the social security wage base of $137,700 = $8,537.40).

The Act provides that the deferral is not available for taxpayers that have Paycheck Protection Program (PPP) indebtedness forgiven under CARES Act sec. 1106.  The IRS released FAQs on the payroll tax deferral.  According to the FAQs, employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer's share of social security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the paycheck protection program loan without incurring failure to deposit and failure to pay penalties.

Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer's share of social security tax due after that date. However, the amount of the deposit and payment of the employer's share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates” defined above.

For taxpayers who are self-employed, notwithstanding any other provision of law, the payment for 50% of self-employment taxes (taxes imposed under Code Sec. 1401(a)) for the payroll tax “deferral period” (defined above) won't be due before the “applicable date” (defined above). 

Also, for any tax year which includes any part of the payroll tax deferral period and in which the taxpayer is required to make estimated tax payments, 50% of the self-employment taxes for the payroll tax deferral period can be excluded as taxes when calculating the taxpayer’s estimated tax payments.

These taxes are only deferred, not forgiven, and will have to be paid at some point.  However, we understand that during this difficult time for many businesses that cash is of the upmost importance.  If any payments can be delayed until a time period when hopefully businesses will be back to normal operations that would be a great benefit. 

If you have any questions about this, or any other, provision of the CARES Act please do not hesitate to contact a member of the Dermody, Burke & Brown team and they will be happy to assist you.

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.