The recently passed CARES Act contained a provision allowing employers to defer the payment of the employer’s share of Social Security taxes. Additionally, self-employed individuals are eligible to defer the payment of certain self-employment taxes. The deferral applies to deposits that would otherwise be due to be made during the “payroll tax deferral period” which is the period beginning on March 27, 2020 and ending on December 31, 2020. Any payroll taxes deferred under this provision are due to be deposited in two equal installments – half by December 31, 2021 and half by December 31, 2022.
While all employers are eligible for this benefit, the language in the CARES Act seemed to indicate that employers who had intended to apply for forgiveness of their Paycheck Protection Program (PPP) loan would be ineligible for this deferral. The IRS, in a series of Frequently Asked Questions (FAQs) posted on their website, has clarified that employers receiving a PPP loan are eligible for this deferral until such time that they receive a decision from their lender that all or part of their PPP loan has been forgiven. The IRS FAQs can be found here.
Lenders will have 60-days to consider applications for loan forgiveness submitted by employers. Upon receiving the decision that their application for forgiveness has been approved, the employer is no longer eligible to defer the payment of the employer’s share of Social Security tax due after that date.
The following example illustrates the interaction between deferral and forgiveness:
Employer receives PPP loan proceeds on April 24, 2020, which starts the 8-week clock to spend the proceeds on qualifying expenses. Assume the application for forgiveness is submitted to the lender on July 1, 2020. The lender notifies the employer on September 1, 2020, that his PPP loan has been forgiven. The employer is eligible to defer the payment of the employer’s share of Social Security taxes due between March 27, 2020, and September 1, 2020. One-half of any taxes deferred would be due by December 31, 2021, and the other half due by December 31, 2022.
While the benefit of the deferral period may be moderate, given the financial hardships many businesses are currently facing, retaining any amount of cash, even if for a short period of time may be beneficial.
Please contact your WG Advisor if you have any questions or for additional information.