Payroll Taxes Can Be Deferred, Even If You’re Taking Advantage of the Paycheck Protection Program
There was some uncertainty on the interaction between the payroll tax deferral and the Payroll Protection Program (PPP). Interpretations ranged from:
- Whether the employer would be eligible for loan forgiveness if payroll taxes were deferred; or
- whether the employer could defer payroll taxes after the PPP loans were forgiven
On April 10, the Internal Revenue Service (IRS) issued taxpayer-friendly guidance via FAQs that clarified these issues.
Employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of Social Security tax through the date the lender issues a decision to forgive the loan without incurring failure to deposit and failure to pay penalties.
Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan was forgiven continues to be deferred and will be due on the “applicable dates”.
Here is a quick recap of the provisions of payroll tax deferral:
- Employer and self‐employed individuals can defer payment of the 6.2% employer share of Social Security taxes on employee wages.
- The deferral period is between 3/27/2020 to 12/31/2020.
- Payment of taxes deferred is to be made as follows on “applicable dates”:
- 50% of the deferral is required to be paid on 12/31/2021;
- Remaining 50% is required to be paid on 12/31/2022
Now let’s go over an example to illustrate what this means for you:
- Company ABC’s share of 6.2% Social Security tax is as follows for:
- Period 3/27/2020 to 3/31/2020: $2,000
- Period 4/1/2020 to 6/30/2020: $50,000
- Period 7/1/2020 to 12/31/2020: $100,000
- Company ABC applies for the PPP loan with XYZ Bank on 4/6/2020.
- Company ABC receives loan from XYZ bank on 4/30/2020.
- XYZ Bank informs Company ABC on 6/30/2020 that the qualifying portion of the PPP loan has been forgiven.
- What is the amount of payroll taxes that can be deferred by ABC?
Payroll taxes in the amount of $52,000 from 3/27/2020 through the date of PPP forgiveness (i.e. 6/30/2020 in our example) can be deferred.
- When do the deferred payroll taxes have to be paid?
The payroll taxes must be paid as follows:
- On 12/31/2021: $26,000
- On 12/31/2022: $26,000
- What is the mechanics of deferring the payroll taxes?
The IRS will be revising Form 941 for the 2nd quarter of 2020 that will reflect deferred deposits and payment due. In addition, guidance on how to reflect deferred deposits for the period 3/27/2020 to 3/31/2020 will be provided soon.
Additional guidance on how the payroll tax deferral works can be found at the IRS’s website here.