CARES Act allows employers to defer employer portion of Social Security payroll taxes

Tax Law and News withholding and Form W-4

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law on March 27, 2020, businesses may delay paying the employer portion of the Social Security payroll taxes on wages paid. According to the IRS, the deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending Dec. 31, 2020.

Any 2020 deferred payroll amounts would be due to the government in two installments:

  1. One-half at the end of 2021.
  2. The remaining one-half at the end of 2022.

This deferral applies to the 6.2% Social Security (old age, survivors, and disability insurance tax) portion of the employer’s obligation. Self-employed people are allowed to defer 50% of their Self-Employment Contributions Act (SECA) tax payment, including any related estimated tax liability. The deferral does not apply to the employee’s portion of the Social Security tax or the 1.45% Medicare tax.

This deferral option isn’t available if the taxpayer had debt forgiven under the CARES Act for certain SBA loans, such as the Paycheck Protection Program loan.

Advantages of the payroll deferral:

  • It helps cash-strapped companies with cash flow.
  • No interest or penalties will be charged, per IRS Notice 2020-22.
  • It applies to all businesses; a business does not need to be adversely affected by COVID-19.
  • No application is needed; the deferral is reflected on the quarterly filing of Form 941, Employers Quarterly Federal Tax Return.
  • The business can use the money for other purposes.

Disadvantages of the payroll deferral:

  • If a business does not need to defer payroll taxes, but chooses to, they may not have the funds when it’s time to pay.
  • The business may have had debt forgiven under a CARES Act loan, which may have been a higher priority.

Evaluating whether to defer the employer portion of Social Security payroll taxes gives tax professionals a good opportunity to provide valuable advisory services to small business owners during this difficult time.

For more information, please visit IRS.gov.

Editor’s note: This article was originally published by the CPA Practice Advisor. Learn from the QuickBooks team how to track deferral payments for Social Security tax payments.

Comments (5) Leave your comment

  1. This tax deferral applies to all businesses? What about the ‘shut down by the government’ or ‘revenue >50% of revenue of same quarter in 2019’? Do these requirements apply to this deferral?

  2. The article states “on wages paid for the period from March 27, 2020, through Dec. 31, 2020.” This differs from IRS guidance, which states “tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020.” You’re going to get two different results depending on which language you choose. If you follow the language in the article, taxes on December 2020 payroll due in January 2021 can be deferred. According to IRS guidance, such taxes would not be included in the deferral period. There’s also a distinction for the beginning of the deferral period. The article language would start the deferral period on deposits due on pay periods March 27 or later; IRS guidance would start the deferral period on any deposits due March 27 or later. Based on my understanding of language in the statute, I believe the IRS guidance is more accurate than what appears in this article.

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