Question: I own and operate a small business. Is it true that the new tax law enables me to defer all of the payroll taxes incurred on the wages I pay to my employees?
Answer: Not exactly. The deferral only applies to some of the payroll taxes that are paid on behalf of your employees.
The Coronavirus Aid, Relief and Economic Securities Act (the “CARES Act”) extends the deadline for employers and self-employed individuals to pay a portion of the Social Security taxes that are imposed on earned income. For employers, the extended due date applies to the employer’s share of Federal Insurance Contribution Act (“FICA”) taxes on employee wages. For self-employed individuals, the extension applies to one-half of FICA taxes which are required to be paid on the earnings of a self-employed individual. The deferred payments can be paid over a two-year period, one-half of which must be paid by December 31, 2021 and the balance by December 31, 2022.
Employers and employees are subject to payroll taxes on wages paid. The FICA portion of payroll taxes consist of a 6.2% tax which is imposed upon and must be withheld from an employee’s wages, up to the current wage base of $137,700. Employers must match the 6.2% FICA tax and pay that amount as well. Medicare taxes of 1.45% are also imposed on employee wages and employers are required to match this amount as well. Self-employed individuals must pay both sides of the payroll tax, equivalent to both the employer share and the employee share.
The tax deferral under the CARES Act applies to wages paid in 2020 but it only applies with respect to FICA taxes, not to Medicare taxes. The tax deferral also applies to only the employer’s matching portion; the 6.2% tax imposed on employee wages still must be withheld from employees’ wages and paid to the government. The same holds true with self-employed individuals as the CARES Act tax deferral only applies to the equivalent of the 6.2% employer share of FICA taxes.
Many business owners have benefitted from payroll protection plan (“PPP”) loans which the CARES Act made available to the business world. While labelled a loan, the indebtedness will be forgiven to the extent the borrowed funds are used to pay payroll and other specified expenses of the business. As originally enacted, the deferred portion of the employer’s share of payroll taxes only applied if the employer was not the beneficiary of a PPP loan. Due to a subsequent legislative change, employers now qualify for the payroll tax deferral, even if they were recipients of PPP loans.
Many of the CARES Act and other favorable tax provisions have eligibility restrictions and benefit only certain size businesses, businesses with income below a certain level and businesses with only a certain number of employees. No such restrictions apply with respect to the payroll tax deferral under the CARES Act. Moreover, no special election is required to defer payment. Employers must simply defer payment as appropriate. Finally, although payments are extended, payroll tax returns must still be filed by the required due date.
From a planning perspective, you might consider accelerating some of your 2021 payroll to 2020. If, for example, you routinely pay bonuses in January of each year, you might consider paying bonuses in December of 2020. This will enable you to take advantage of the tax deferral which will not be available for bonuses paid after December 31, 2020.
Also worthy of mention is the recently announced payroll tax deferral for employees earning less than $104,000 per year. The deferral applies to the employees’ share of FICA taxes. While the details continue to emerge, eligible employees can defer payroll taxes on their wages paid from September 1, 2020 through the end of the 2020 year. The new incentive is simply a deferral and must be repaid by employees in 2021 meaning workers will face reduced paychecks in the future to repay the deferred taxes.
The Tax Corner addresses various tax, estate, asset protection and other business matters. Should you have any questions regarding the subject matter or if you have questions you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfbbg.com.
[DISCLAIMER – This information is solely for information purposes and does not constitute legal advice. Please contact SFBBG with all legal questions.]