The more than $2 trillion CARES Act contains several provisions to help small businesses recover from the economic impact of the coronavirus epidemic. Two, the Employee Retention Credit and the Employer Payroll Tax Deferral, are related but different in function.
The Employee Retention Credit provides businesses with an up to $5,000 per full-time employee payroll tax credit while the Employer Payroll Tax Deferral allows your business to postpone paying some payroll taxes due in 2020 by paying half of those taxes at the end of 2021 and the other half at the end of 2022.
- Nearly all businesses and self-employed individuals are eligible for this deferral.
- The provision lets you defer payment of the employer share (50%) of Social Security taxes on wages earned from Mar. 27 thru Dec. 31, 2020.
- If your PPP loan is forgiven, you are not eligible.
- This payroll tax deferral is not a payroll tax credit which is covered under another program.
The Deferral Applies to Employer Social Security Tax Only
Both the deferral and the credit apply to the employer portion of Social Security taxes (6.2% of wages). This means that you are self-employed, you can defer payment of 50% (6.2%) of the 12.4% Social Security self-employment tax. You can't defer payment of Medicare taxes (2.9% or the employee portion of Social Security taxes (6.2%).
You Can Defer Payments in Advance of Credits
The payroll tax payment deferral is in addition to the provisions of the Employee Retention Credit and credits granted under the Families First Coronavirus Relief Act (FFCRA). In other words, you can defer payment of your (employer) portion of Social Security taxes (6.2% of wages) for all employees for wages paid between Mar. 27, 2020 and Dec. 31, 2020.
You can continue to defer any payments not covered by either the FFCRA credit or the Employee Retention Credit with one exception. If you receive a Payroll Protection Program (PPP) forgivable loan, you cannot defer payment once you have been informed that the loan has been forgiven.
Near Universal Eligibility
Unlike the credit, the deferral applies to almost all businesses and self-employed individuals, whether affected by COVID-19 or not. The deferral requires no special election on your part.
There are several rules you need to know to maximize your access to this provision and also avoid penalties for late deposit of taxes:
- Although you cannot defer payment once your PPP loan has been forgiven, you can defer payment if you have applied for or received a loan, as long as the loan has not been forgiven.
- As an employer, you are liable for timely payment of employment taxes even if you designate an agent to deposit those taxes for you.
- You must deposit 50% of deferred taxes by Dec. 31, 2021, and the remainder by Dec. 31, 2022, or face significant failure-to-deposit penalties.
Don't forget that the payroll tax deferral is for taxes due in 2020 and filed in 2021. This does not affect 2019 taxes due July 15, 2020.
Accounting for Your Deferral
For regular employers who file Form 941, Employer's QUARTERLY Federal Tax Return, the IRS advises that it will release a revised Form 941 to be used for Q2 2020. This revised form will include information on how you should reflect deferred deposits and payments that would have been due for Q1 2020.
If you are self-employed, you file estimated taxes using Form 1040-ES. Estimated payments that would have been due April 15 and June 15 have been postponed until July 15 to coincide with the new Federal income tax deadline. If you wish to defer 6.2% of Social Security taxes based on estimated income from Mar. 27 thru Dec. 31, 2020, you can deduct that amount from total taxes due and adjust your quarterly payments accordingly.
Employer Payroll Tax Deferral vs. Employee Retention Credit
In general, there are fewer restrictions on deferring payment of your company's portion of Social Security taxes than there are on receiving full refundable credit on those taxes. The table below illustrates the main differences between the two provisions of the CARES Act.
|Payroll Tax Deferral||Payroll Tax Credit|
|Employers||All||Partial or full closure by law (or)
Significant decline in gross receipts
|Employees||All||100 or more full-time, not working
>100 full-time, working or not
|Timeline||Mar. 27 - Dec. 31, 2020||Mar. 13 - Dec. 31, 2020|
|Taxes affected||Employer portion of SS taxes||Employer portion of qualified SS taxes|
|Taxes due||50% 12/31/21; 50% 12/31/22||None + potential refund|
|Impact of PPP Loan||No deferral after loan is forgiven||No credit if loan received|
|Impact of FFCRA||None||No credit for FFCRA credits|
U.S. Congress. "H.R. 748." Accessed Apr. 18, 2020.
IRS. "Deferral of employment tax deposits and payments through Dec. 31, 2020." Accessed Apr. 18, 2020.
IRS. "Estimated Tax." Accessed Apr. 18, 2020.
White and Williams. "Cares Act: Payroll Tax Deferral." Accessed Apr. 18, 2020.
IRS. "Form 1040 ES." Accessed Apr. 18, 2020.