CARES Act allows employers to defer employer portion of Social Security payroll taxes

This content is for the first stimulus relief package, The Coronavirus Aid, Relief and Economic Security Act (CARES Act), which was signed into law in March 2020. For information on the second stimulus relief package, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, please visit the second post here.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law on March 27, 2020, businesses may delay paying the employer portion of the Social Security payroll taxes on wages paid. According to the IRS, the deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending Dec. 31, 2020.

Any 2020 deferred payroll amounts would be due to the government in two installments:

1. One-half at the end of 2021.
2. The remaining one-half at the end of 2022.

This deferral applies to the 6.2% Social Security (old age, survivors, and disability insurance tax) portion of the employer’s obligation. Self-employed people are allowed to defer 50% of their Self-Employment Contributions Act (SECA) tax payment, including any related estimated tax liability. The deferral does not apply to the employee’s portion of the Social Security tax or the 1.45% Medicare tax.

Thanks to the PPP Flexibility Act, this deferral option is now available if the taxpayer or borrower is eligible to receive loan forgiveness under the CARES Act for certain SBA loans, such as the Paycheck Protection Program loan.

Advantages of the payroll deferral:

• It helps cash-strapped companies with cash flow.
• No interest or penalties will be charged, per IRS Notice 2020-22.
• It applies to all businesses; a business does not need to be adversely affected by COVID-19.
• No application is needed; the deferral is reflected on the quarterly filing of Form 941, Employers Quarterly Federal Tax Return.
• The business can use the money for other purposes.

Disadvantages of the payroll deferral:

• If a business does not need to defer payroll taxes, but chooses to, they may not have the funds when it’s time to pay.

Evaluating whether to defer the employer portion of Social Security payroll taxes gives tax professionals a good opportunity to provide valuable advisory services to small business owners during this difficult time.

For more information, please visit IRS.gov.

Editor’s note: This article was originally published by the CPA Practice Advisor. It was originally published on the Tax Pro center on May 11, 2020, and was updated on June 24, 2020, to reflect the PPP Flexibility Act. Learn from the QuickBooks team how to track deferral payments for Social Security tax payments.

Note: The Paycheck Protection Program Flexibility Act (“PPP Flex Act”) was signed into law on June 5, 2020. The PPP Flex Act extends the availability of loans under the Paycheck Protection Program (PPP) and adjusts certain rules applicable to PPP loans. The information reflected here may therefore be outdated. We are working to update our resources to reflect these updates to the PPP, so be sure to check back soon. Please refer to the latest guidance from the SBA and Treasury to confirm current program rules and how they apply to your particular situation.

PPP borrowers may engage the services of an accountant to track the use of their PPP funds. However, only the borrower or an authorized representative who is legally authorized to make certifications on the borrower’s behalf may submit an application for loan forgiveness. Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application.

The funding described is made available to businesses located in the United States of America and are not available in other locations.