Struggling Orlando businesses can now defer paying the IRS a portion of their payroll taxes according to the multi-trillion-dollar economic stimulus package that cleared Congress Friday.
Every workers’ share would still need to be collected and passed on to the IRS.
Erica York, an Economist with the Tax Foundation said, “Companies would still be withholding from paychecks and remitting that to the IRS as usual, but their half of payroll taxes would be delayed.”
The payroll taxes withheld from wages are used to fund government programs, primarily Social Security and Medicare. Payroll taxes are in addition to the federal and state income taxes that are withheld.
Essentially, employees and their employer split the payroll taxes paid to the IRS. Social security withholdings are 6.2% of your wages, up to $137,700 for the current tax year (2020). This amount is withheld from your paycheck and paid to the IRS, along with a matched amount by your employer. In total, your amount, plus your employer’s amount equals 12.4% of your wages to support Social Security.
Medicare withholdings are 1.45% for both you and your employer. There is no cap on Medicare withholdings. In fact, if you earn over $200,000, the IRS requires an additional withholding of 0.9% for Medicare.
If you are self-employed, you pay the shares for both employer and employee, however, you can generally deduct half of the payments on your tax return.
Payroll taxes, the amounts withheld and employer matched amounts, are typically paid monthly or semi-weekly to the IRS.
“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 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.
Orlando businesses that defer Social Security payroll taxes 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.
Many provisions aimed at Orlando small businesses are included in the bill.
A loan program was also included by lawmakers that allows Orlando companies to borrow up to $10 million for payroll and to cover other expenses – as well as an employee retention credit to incentivize Orlando companies to keep workers.
While tax deferral offers immediate relief to Orlando companies in 2020, if a recession comes, business and tax experts fear the levies could pile up and strain a company’s balance sheet.
“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.
At first glance, the decision to defer paying 6.2% of wages may not sound like much, but it adds up over time.
Over the remainder of the year, an Orlando small business that pays an employee $1,000 a week in wages could save $2,418. The savings are intended for employers to use to pay employees and staff.
Since Medicare is not included in the deferral amounts, employers will still be on the hook for paying 1.45% of wages for Medicare withholdings.
Deferral is one part of the relief measures. Many Orlando small businesses will need help to navigate the options.
“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 some degree of foretelling by Orlando small business owners:
Will you be able to set aside the money you need for taxes?
Will you be able to pay your deferred 2020 levies at the same time you pay your 2021 and 2022 payroll tax 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.
The Employer Payroll Tax Delayed Payment Summary (§ 2302)
Senate Bill: 116th Congress, Senate Bill 3548 – CARES Act, Introduced 3/19/2020
Direct Link: Senate 3548
Starting from the effective date of the CARES Act through the end of 2020, the bill allows for employers to defer payments of the employer portions of social security taxes.
The bill includes the following provisions:
Starting on the effective date of the CARES Act through the end of the 2020 calendar year, employers (including self-employed individuals) can defer their portion of the social security taxes normally due on wages paid (this is generally 6.2%). Employers must pay the employee portion of the payroll tax due to the IRS on the same dates they were scheduled to pay it before.
Employers are responsible for paying their portion of the Medicare Tax (which is 1.45%).
Any deferred amounts can be paid in two equal installments, the first is due on December 31, 2021 and the second is due on December 31, 2022.
Employers with Small Business Administration loans forgiven under Section 1109 of the CARES Act are not eligible for this deferral.
How J David Tax Law Can Help Orlando Businesses
The tax attorneys at J David Tax Law in Orlando, FL are available to help individuals and businesses determine their risk associated with deferring payroll tax payments. Our tax experts can also work with the IRS to determine your qualification for other tax relief programs only available during this time.
He is the founder and Managing Partner of J. David Tax LawSM. He is the winner of the 2019 Ultimate Tax Attorney awarded by the Jacksonville Business Journal. This award recognizes law firms and attorneys who show exemplary professional talent and skill while demonstrating superior client care, leadership, charitable concern, and civic engagement. Jonathan graduated from Chapman University School of Law. He has practiced law since 2011.
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.