Struggling companies can now defer paying a portion of their payroll taxes to the IRS according to the multi-trillion-dollar economic stimulus package that cleared Congress on Friday. Companies will still be required to collect and pay each employee’s share to the IRS.
“Companies would still be withholding from paychecks and remitting that to the IRS as usual, but their half of payroll taxes would be delayed,” said Erica York, an economist with the Tax Foundation.
Payroll taxes withheld from wages are used to fund government programs like Social Security and Medicare. There is an employer contribution, as well as an employee contribution. The taxes that companies can defer are in addition to your federal and state income tax withholdings.
Social Security withholdings are 6.2% of your wages — up to $137,700 for 2020. These amounts are withheld from your paycheck and sent to the IRS. Your company also pays a matched amount, so the IRS receives a total of 12.4% of your wages to support Social Security.
Medicare withholdings are 1.45% of your wages, with no cap on wages subject to that portion of payroll taxes. For incomes above $200,000, an extra 0.9% Medicare tax is withheld. Self-employed people are required to pay both the employer and employee share but they are usually able to deduct half of the amount on their tax returns.
Typically, on a monthly or semi-weekly basis, companies must regularly remit payroll taxes to the IRS — both their contribution and what they withhold from employees’ paychecks. “That means they have to have cash on hand to pay the taxes in a timely way,” York said. “Offering a deferral on those payments helps ease the liquidity crunch many are facing,” she said. “It’s meant to help bridge the gap in the crisis, so companies have [cash] to meet other obligations right now and pay their share of the taxes later.”
“Qualifying companies will be able to delay their share of Social Security payroll taxes to the IRS. They would be delayed until Jan. 1, 2021, with 50% owed by the end of 2021 and the other half due Dec. 31, 2022. Companies’ share of the Medicare payroll tax will still be due as usual,” York said.
Companies that elect to defer Social Security payroll tax payments will have until the end of 2021 to pay the first half of the deferred levies. The remaining tax liability is due on or before Dec. 31, 2022.
This provision in the bill is one of many aimed at small businesses.
The lawmakers also included a loan program that allows companies to borrow up to $10 million for salaries and other expenses. They also included an employee retention credit to incentivize companies to keep employees.
While tax deferral offers immediate relief to companies in 2020, experts fear the levies will pile up and strain a company’s balance sheet, especially if a recession hits.
“My concern is that we see a lot of businesses that are just three months behind on their payroll tax payments and can’t catch up on payments to the IRS. Nine months will cause a lot of payroll tax to pile up and that could be detrimental to businesses if we go into a recession,” said Jonathan David Sooriash, Esq., Managing Partner at J. David Tax Law.
When you first hear about it, deferring payments on 6.2% of wages may sound like a good idea, but the payments will add up over time.
If you are a small business paying an employee $1,000 in weekly wages, you could save $2,418 per employee over the remainder of the year. The deferral is purely intended to allow employers to have access to cash so they can pay employees and staff. Employers are still required to pay the 1.45% of wages that goes toward Medicare.
Most small businesses won’t be able to navigate the options alone.
“Due to the complexity of the stimulus package, many businesses will need to consult with three different professionals to get the best advice,” said Mr. Sooriash.
“You’ll need a banker to talk about the loans, an employment attorney to talk about paid leave requirements and a tax attorney to talk through the tax aspect and ensure you don’t end up owing more payroll taxes than you can pay,” he said.
Determining whether deferment makes sense requires small business owners to have a degree of prognostication:
Will they be disciplined during this event to set aside the money needed for the taxes?
Will they be able to pay the deferred 2020 levies along with their 2021 and 2022 payroll obligations?
“What if the economy continues to decline or the sector your business is in does, then how will the payroll taxes be paid?” said Mr. Sooriash.
“Having positive cashflow today is great, but it’s important for businesses to keep in mind that owing the most powerful collection agency in the world is not where any business wants to be once the Coronavirus situation is over,” said Mr. Sooriash.
Delayed Payment of Employer Payroll Taxes Summary (§ 2302)
The Bill: 116th Congress, Senate Bill 3548 – CARES Act, Introduced 3/19/2020 The Direct Link: Senate 3548
From the effective date of the CARES Act through the end of 2020, the bill allows employers to defer payment of the employer portion of social security taxes.
Here are the highlights:
The CARES Act states employers (including self-employed individuals) can defer their portion of the social security taxes otherwise due on wages paid (generally 6.2%), beginning on the effective date of the CARES Act until the end of the 2020 calendar year.
Employers must pay the employee portion of payroll taxes due to the IRS on the same schedule as before.
Employers are still be responsible for paying their portion of the Medicare Tax (which is 1.45%).
The deferred amounts can be split into two equal installments. The first payment is due on December 31, 2021 and the second payment is due on December 31, 2022.
Employers with Small Business Administration loans that have been forgiven under Section 1109 of the CARES Act are not be eligible for deferring payroll taxes.
How J David Tax Law Can Help You
The tax attorneys at J David Tax Law are available to help individuals and businesses determine the risks associated with deferring payroll taxes. Our experts can also work with the IRS to see if you qualify for other tax relief programs that are only available during this time.
We provide tax solutions for our clients who have IRS and state tax debts, unfiled returns, audits, etc. We advise you on future compliance that enables your individual or business tax problems to be behind you for good.