The more than $2 trillion CARES Act contains several provisions to help small businesses recover from the economic impact of the coronavirus epidemic. Two of these provisions are the Employee Retention Credit and the Employer Payroll Tax Deferral. Both 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 the Employer Payroll Tax Deferral.
- The provision lets you defer payment of the employer share (50%) of Social Security taxes on wages earned from March 27 through Dec. 31, 2020.
- If your PPP loan is forgiven, you are not eligible.
- This payroll tax deferral is not a payroll tax credit. The credit 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 if 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 Response 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 March 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 Paycheck 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.
Accounting for Your Deferral
Form 941, the Employer's QUARTERLY Federal Tax Return "was revised for the second, third, and fourth quarters of 2020 to reflect the employer's deferral of the employer's share of Social Security tax."
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 were postponed to 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 March 27 thru Dec. 31, 2020, you can deduct that amount from the 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||March 27 - Dec. 31, 2020||March 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 Dec. 11, 2020.
IRS. "Deferral of employment tax deposits and payments through Dec. 31, 2020." Accessed Dec. 11, 2020.
IRS. "Estimated Tax." Accessed Dec. 11, 2020.
White and Williams. "Cares Act: Payroll Tax Deferral." Accessed Dec. 11, 2020.
IRS. "Form 1040 ES." Accessed Dec. 11, 2020.