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IRS Issues Guidance on Employer Payroll Tax Deferral

Posted by Ann Bond, CPA on Apr 21, 2020 11:22:31 AM

The $2 trillion stimulus package approved by Congress to address the COVID-19 pandemic provides relief to businesses – and self-employed individuals – in the form of an employer payroll tax deferral. Payroll taxes, which account for nearly 25% of federal, state and local government revenue, are paid by employers and employees to fund essential social welfare programs such as Social Security and Medicare. Generally, both parties pay 6.2% toward Social Security and 1.45% for Medicare, though higher earners pay more toward Medicare.

To stem economic damages from the pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) gives employers until 2022 to pay 2020 payroll taxes, though they must pay 50% by the end of 2021. Under the CARES Act, the employer’s portion of Social Security tax that would have been made between March 27 and December 31, 2020 is deferred.

Related Webinar Recording: A Cost-Benefit Approach to PPP Loan Forgiveness 

On April 10, the IRS issued additional guidance about the key deferral provisions:

  • The IRS clarified whether an employer that is taking advantage of loan forgiveness under the Payment Protection Program (PPP) can take advantage of the deferral. While the law seemed to imply they could not, the guidance clarifies that is not entirely the case. Employers may not defer the deposit and payment of the employer’s portion of the Social Security tax that would be due after a lender informs the employer that the loan is forgiven. However, the employer can defer applicable taxes up to the date of that decision.
  • The IRS also addressed the order in which the employer payroll tax deferral relates to employment tax credits, such as the Families First Coronavirus Response Act (FFCRA) and the CARES Act Employee Retention Credit. First, the employer must determine how much it can defer under the employer payroll tax deferral. Then they can reduce the employment tax deposit accordingly for the FFCRA credit or the Employment Retention Credit.
  • Employers do not have to make a special election to defer deposits and payments. The IRS plans to make revisions to Form 941 effective for the second quarter of 2020. The IRS will issue directions for payments regarding deposits and payments from the first quarter of the year

As a reminder, the payroll tax deferral does not apply to employee income tax withholding, the employee portion of the Social Security tax or the employer or employee portion of the Medicare tax.

Looking ahead, some policymakers are proposing a payroll tax holiday for businesses and their employees later this year. GPP will keep you posted about further developments.

COVID-19 Resources and Planning Services

Congress is currently deliberating an additional $250 billion to small businesses loan funding. GPP will keep you posted through our COVID-19 Business Assistance and Resource Center. If your small business needs loan assistance during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.

For immediate questions, email CARETEAM@GPPcpa.com

Note: This content is accurate as of the date published above and is subject to change, as definitions change. Please seek professional advice before acting on any matter contained in this article.

Topics: IRS, payroll taxes, Tax Deferrals