Why Your Business Clients May See Some Payroll Tax Relief

It’s hard enough for businesses to remain afloat during COVID-19 without having to fork over payroll taxes. But the Coronavirus Aid, Relief and Economic Security (CARES) Act provides some relief as it allows businesses to defer payroll taxes until, hopefully, they can get back on their feet.

May 13th 2020
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Generally, an employer is responsible for its share of certain federal payroll taxes—including employer contributions under the Federal Insurance Contributions Act (FICA)—with respect to its employees. For 2020, the FICA tax is composed of a Social Security tax of 6.2 percent on a wage base of $137,700 and the 1.45 percent Medicare tax on all wages. Say an employee is paid $150,000 a year, the employer’s share of the federal payroll tax in 2020 comes to $8,537.40 in Social Security tax (6.2 percent of $137,700) plus $2,175 in Medicare tax (1.45 percent of $150,000) for a total of $10,712.40.

Comparable rules apply to self-employed individuals for self-employment tax. They must pay 12.4 percent on amounts up to the Social Security wage base and 2.9 percent for Medicare tax, but half of the overall amount is deductible.

Now, under the CARES Act, an employer can defer the Social Security tax component of these payroll taxes for the period between March 27, 2020, the date of enactment, and December 31, 2020. The employer may pay 50 percent of the required Social Security tax by December 31, 2021 and the remaining 50 percent by December 31, 2022. Going back to our example, the employer can effectively defer payment on $4,268.70 (50 percent of $8,537.40) for one year and the remaining $4,268.70 for two years.

Note that this provision doesn’t apply to Medicare tax obligations. But there is no dollar cap on the total amount of Social Security tax that is due through December 31, 2020.

Similarly, self-employed individuals can postpone the Social Security tax component of self-employment tax. They can defer 50 percent of the self-employment tax that is due by paying 25 percent by December 31, 2021 and 25 percent by December 31, 2022.

Unlike the employee retention credit, the payroll tax deferral is available to all employers, regardless of size. Despite the liberal eligibility requirements, employers who receive loan forgiveness under other provisions of the CARES Act don’t qualify for the payroll tax deferral. This includes loans forgiven under the Paycheck Protection Program (PPP). Thus, carefully consider the impact of PPP loans.

Finally, remember that this only a deferral and not a waiver of payroll tax obligations. Eventually, employers and self-employed individuals will have to pay the tax piper.

Inform your business clients about this important payroll tax development. Help them coordinate payments to fit their circumstances.

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