On March 11, 2021, President Joe Biden signed into law the American Rescue Plan Act, a $1.9 trillion bill that extends many forms of federal assistance for small businesses impacted by the coronavirus pandemic that were first introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Two of these provisions are the employee retention credit and the employer payroll tax deferral. These are related but function differently. The employee retention credit provided businesses with a payroll tax credit of up to $10,000 per full-time employee per quarter through Jan. 1, 2022, while the employer payroll tax deferral allowed 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 were eligible for the employer payroll tax deferral.
- The provision let you defer payment of the employer share (50%) of Social Security taxes on wages earned from March 27, 2020, through Dec. 31, 2021.
- This payroll tax deferral was not a payroll tax credit. The credit is covered under another program.
Only for Employer Portion of Social Security Taxes
The deferral (and the credit) applied to the employer portion of Social Security taxes (6.2% of wages). This means that if you were self-employed, then you could defer payment of 50% (6.2%) of the 12.4% Social Security self-employment tax. You couldn’t defer payment of Medicare taxes (2.9%) or the employee portion of Social Security taxes (6.2%).
You Could Defer Payments in Advance of Credits
The payroll tax payment deferral was 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 could defer payment of your (employer) portion of Social Security taxes (6.2% of wages) for all employees for wages paid from March 27, 2020, through Dec. 31, 2021.
Initially, you could continue to defer any payments not covered by either the FFCRA credit or the employee retention credit—with one exception. If you received a Paycheck Protection Program (PPP) forgivable loan, then you could not defer payment once you were informed that the loan had been forgiven. However, that exception was eliminated by the Paycheck Protection Program Flexibility Act of 2020, which went into effect on June 5, 2020.
Unlike the credit, the deferral applied to almost all businesses and self-employed individuals, whether affected by COVID-19 or not. The deferral required no special election by employers.
There are two rules you needed to know to maximize your access to this provision and avoid penalties for late deposit of taxes:
- 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, then you file estimated taxes using Form 1040-ES. Estimated 2020 payments that would have been due April 15, 2020, and June 15, 2020, were postponed to July 15, 2020, to coincide with the new federal income tax deadline. If you wanted to defer 6.2% of Social Security taxes based on estimated income from March 27, 2020, through Dec. 31, 2020, then you could 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 on receiving full refundable credit on those taxes. The table below illustrates the main differences between the two provisions.
|Payroll Tax Deferral||Payroll Tax Credit|
|Employers||All||Partial or full closure by law
Significant decline in gross receipts
|Employees||All||100 or more full-time, not working
> 100 full-time, working or not
|Timeline||March 27, 2020, to Dec. 31, 2021||March 13, 2020, to Dec. 31, 2021|
|Taxes affected||Employer portion of SS taxes||Employer portion of qualified SS taxes|
|Taxes due||50% Dec. 31, 2021; 50% Dec. 31, 2022||None + potential refund|
|Impact of PPP Loan||None||No credit if loan received|
|Impact of FFCRA||None||No credit for FFCRA credits|
U.S. Congress. “H.R.1319 — American Rescue Plan Act of 2021.”
U.S. Congress. “H.R.748.”
U.S. Department of Agriculture National Finance Center. “Employee FAQ — Payroll Tax Deferral.”
U.S. Congress. "H.R. 7010."
Internal Revenue Service. “Deferral of Employment Tax Deposits and Payments Through December 31, 2020.”
Internal Revenue Service. “Form 941 (Rev. July 2020).”
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