June 9 update: This article has been edited to reflect new guidance introduced in the Paycheck Protection Program Flexibility Act of 2020.
Congress has created numerous tax incentives to assist businesses during this unprecedented time, including the Paid Sick and FMLA Payroll Tax Credit and the Employee Retention Credit. In addition to these, the CARES Act also added a new provision allowing employers to defer the payment of the employer’s portion of Social Security (FICA) taxes for a minimum of 12 months and, for some deferrals, a period of more than 32 months.
About the Incentive
The CARES Act allows all employers, including self-employed individuals and partners who pay self-employment taxes, to defer the payment of the employer’s share of FICA taxes and certain railroad taxes. The payroll deferral period began on March 27, 2020 and will end on December 31, 2020. Half of the deferred amount will be payable on December 31, 2021, with the remaining half payable on December 31, 2022 — all without any interest assessed.
It is important to note that employers must continue to deposit the employer’s share of Medicare tax, as well as the employee’s share of payroll taxes withheld.
Employers who received Paycheck Protection Program (PPP) loans from the SBA also qualify for this employer FICA tax deferral provision. As per the Paycheck Protection Program Flexibility Act of 2020, signed by President Trump on June 3, 2020, new and existing borrowers are eligible for payroll tax deferral, even after loan forgiveness occurs.
Any employer’s FICA taxes up to issuance of the lender’s decision are eligible for the deferral, with 50% of the payment due on December 31, 2021 and 50% on December 31, 2022. A delay in the forgiveness of loan decision (including the audits of loans over $2 million) will be a benefit to the borrowers by increasing the amount of interest-free loan they receive with respect to the employer’s portion of FICA taxes. Of course, it also increases the one percent interest a PPP borrower must pay on the PPP loan.
The deferral of the employer’s portion of FICA tax must be deposited on December 31, 2021 and 2022 to avoid any penalties. Late deposit penalties range from 2% to 15%, and failure to pay penalties can be as high as 25% of the employer’s share of FICA taxes.
IRS Notice 2020-22 provides relief from the penalty for failing to deposit employment taxes, including taxes withheld from employees, in anticipation of the Paid Sick and FMLA Payroll Tax Credit and the Employee Retention Credit. However, this relief will most likely not extend to the employer FICA tax deferral provision.
How It Will Work
Employers are not required to make a special election to take advantage of this generous deferral of the employer’s FICA taxes. The IRS has released a draft of the revised Form 941 and its instructions for 2020. Line 13b was added to reflect the deferred amount of the employer’s share of FICA tax during the calendar quarter. The updated form will be available to use starting the second quarter of 2020 (April 1 to June 30). Self-employed individuals may revise their quarterly estimated tax payments.
Now is the time to start taking advantage of an interest-free loan by deferring the employer’s portion of FICA taxes and recalculating self-employed person’s estimated tax liabilities to improve current cash flow.
Finally, if your business has not applied for the PPP loan, it’s not too late. Funds are still available. The SBA continues to issue guidance to clarify the program requirements and how the forgiveness will work. This program also includes self-employed persons, partnerships, and seasonal employers. In these uncertain economic times, this is a great opportunity to help businesses increase cash flow and improve sustainability through potential loan forgiveness or a low 1% interest rate loan for two years and up to five years for new PPP loans. Existing loans may be extended up to five years if the borrower and lender agree.
For questions on this tax deferral opportunity and other CARES Act programs, contact a Clark Nuber professional.
Anshu Gupta is a senior in Clark Nuber’s Tax Services Group.
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