Additional Cash Flow Relief for Businesses under the CARES ACT: Deferral of Social Security Tax Payments
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) gives the opportunity for (1) employers to potentially defer the deposit and payment of the employer’s share of Social Security taxes; and (2) self-employed individuals to potentially defer payment of certain self-employment taxes. This is a welcome relief to many businesses struggling to cover operating costs through the CODID-19 pandemic. Although most of the CARES Act publicity has focused on the Paycheck Protection Program (commonly referred to as “PPP Loans”), this opportunity is available to all businesses and self-employed individuals.
Employers: The decision to defer the employer portion of Social Security tax are complicated and you should discuss this with your tax attorney or CPA prior to making the decision. In general, however, Section 2302 of the CARES Act allows employers to defer payment of the employer portion of Social Security tax otherwise due between March 27 and December 31, 2020. The deferred amount of these taxes is due in two tranches: half on December 31, 2021; and half on December 31, 2022. If the payments are not made, IRS penalties will apply. This relief does not apply to taxes withheld from the employee’s wages—only the employer’s portion of Social Security tax.
The employer portion of Social Security tax is 6.2 percent of all wages paid. By deferring these taxes from March through the end of the year, the government is essentially giving employers interest free loans. Further still, the ability to take advantage of this is unusually easy. The Form 941, Employer’s Quarterly Federal Tax Return, will be revised for the second calendar quarter of 2020 (April – June, 2020) to make this election simple. We are expecting guidance any day from the IRS to instruct employers how to report the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January – March 2020). The IRS has stated that employers will not be required to make a special election to be able to defer deposits and payments of these employment taxes.
Self-Employed Individuals: Self-employed individuals and single-member LLCs who have not made an election to be taxed as an S-corporation, may defer the payment of 50 percent of the Social Security tax on net earnings from self-employment income. As a result, there is a great deal of parity between how this relief provision affects businesses both small and large.
Coordination with PPP Loans: When the CARES Act was first passed, there was some question as to how the deferral of the employer’s portion of Social Security tax would be coordinated with PPP loans and the forgiveness of those loans. The IRS has stated that employers who have received a PPP loan may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan in accordance with Section 1106 of the CARES Act, 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 is forgiven, continues to be deferred until the due dates mentioned above.
Although the PPP loan process has been a tortured one for most small businesses, the ability to defer deposits of Social Security tax and a percentage of self-employment income applies to all business owners. In our opinion, it is not getting the attention it deserves in the news, as it will no doubt be a major safety net for those struggling to find cash flow during the COVID-19 pandemic.
If you would like to discuss this as a possible option for your business, either now or after your business re-opens, please contact Tyler Jones or Scott Collins at Helsell Fetterman LLP. We are here to help you during this difficult time.