What is the Federal Payroll Tax Deferment?

payday federal payroll tax deferment

Many small businesses are applying for economic assistance through either EIDL or PPP loan programs. However, it seems that getting approval for these programs is taking longer than anticipated. What are some other ways that small business owners can get more immediate relief? As part of the CARES Act, employers can seek deferment of certain federal payroll tax deposits and payments through December 31, 2020.

What is it?

Businesses are allowed to defer the deposit and payment of the employer’s share of social security taxes, without incurring penalties. In addition, self-employed individuals may defer the payment of 50 percent of the social security portion of the self-employment tax on the net earnings of their self-employment income. 

The deferral only applies to an employer’s share of social security taxes and 50 percent of the social security portion of the self-employment tax that would otherwise be required during the period beginning on March 27, 2020 and ending December 31, 2020. 

The deferred taxes must be deposited by the following dates to be treated as timely:

  • On December 31, 2021: 50% of the deferred amount
  • On December 31, 2022: The remaining amount

Who can qualify?

All employers are eligible for federal payroll tax deferment. However, if you receive a loan through the SBA’s Paycheck Protection Program (PPP), there are a few additional restrictions:

  • If you have received a PPP loan, and that loan has not yet been forgiven, you may defer deposits of employer social security taxes. 
  • If your PPP loan is forgiven, any employer social security taxes incurred after the loan forgiveness date cannot be deferred. 

How do I apply?

Employers are not required to make a special election to be able to defer these employment taxes. According to the most recent IRS Press Release, more instructions will be coming in the near future on how to reflect deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020.

Many small businesses use a third-party service to run payroll.  As a result, some payroll processing services are offering assistance to their customers on setting up payroll tax deferrals. For example, clients using Gusto are directed to a special COVID-19 resources page where they can simply select the option to defer employer social security taxes. 

If you determine that you want to defer the employer’s portion of the social security taxes, contact your payroll provider as soon as possible to set this up for your account. 

While this provision may not provide additional capital, it can furnish small business owners with some immediate relief during this critical time. 

Note: The information provided in this blog does not, and is not intended to, constitute legal or tax advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information in this blog may not constitute the most up-to-date information. This blog contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser.