How the Delayed Payment of Employer Payroll Taxes Will Help Business

Most employers are required to withhold social security taxes from wages paid to employees. Self-employed individuals are subject to self-employment (SECA) tax, effectively paying both the employer and employee share of social security taxes.

One of the provisions of the CARES Act allows taxpayers to defer paying the employer portion of the social security taxes through the end of 2020. Half of the deferred amount will be due at the end of 2021 and the other half will be due at the end of 2022. Basically this provision amounts to an interest-free loan with no strings attached — unless the business fails to pay when that loan matures.

Here’s how it works:

Applicable employment taxes do not include the employer portion of Medicare taxes.

Payroll tax deferral period means the period beginning on the date of enactment of the CARES Act (March 27, 2020) and ending before Jan. 1, 2021.

Applicable date means:

1. Dec. 31, 2021, with respect to 50% of the amounts deferred, and
2. Dec. 31, 2022, with respect to the remaining 50% deferred.

Payment for half of these taxes will not be due until the end of 2021 and the other half will not be due until the end of 2022.  Effectively, employers will be treated as having timely paid these taxes retroactive to their due date so long as they are ultimately paid by the extended due dates.

Similar rules apply to half of the SECA taxes paid by self-employed individuals related to social security tax (but not Medicare tax).

Caution: This interest-free loan for the employer portion of social security taxes is not available to any taxpayer that “has had indebtedness forgiven” under CARES Act Section 1106 with respect to a Payroll Protection Program or PPP loan.  So, the first trap for the unwary is that getting a PPP loan may prevent or limit a taxpayer from availing themselves of these delayed payroll tax provisions.  However, entitlement to forgiveness of a PPP loan depends on the ability of the taxpayer to establish that it has deployed the funds on covered expenses and that won’t happen until sometime in the future — making it hard for taxpayers to make an informed decision. So, if you expect to take advantage of the PPP loan forgiveness, do not defer any payroll taxes under this program.

Please contact us to discuss what alternative will be the best for your company.  Each situation is different, and CironeFriedberg is here to help you explore your options.

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