Payroll tax postponement offers additional relief for employers
Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, is a new law intended to provide financial relief to individuals and business alike who have been affected by the coronavirus pandemic. The $2.2 trillion stimulus plan has multiple provisions, including deferring payroll taxes for qualifying employers.
This segment of CARES Act has been called payroll tax postponement or payroll tax deferral.
A quick refresher… “What are payroll taxes?”
Payroll taxes are amounts withheld from employees’ wages by their employer. Payroll taxes include Federal income tax withholding, and the employee’s portion of Social Security, and Medicare. These taxes are deducted from an employee’s earnings and paid directly to the IRS. Additionally, employers send their portion of Social Security and Medicare taxes with the employees’ portion when they deposit taxes.
Federal income tax withholding can be 0% or higher depending on the taxpayer’s W-4. Social Security and Medicare is 7.65% for the employee portion withheld from their gross pay and the employer also pays 7.65% for their portion when they deposit the employee’s portion (6.2% is Social Security and 1.45% is Medicare.)
What part of payroll taxes can employers defer with payroll tax postponement?
As part of the CARES Act, employers can defer payment of the employer’s portion of Social Security taxes payments and certain railroad retirement taxes. In normal circumstances, an employer must remit 6.2% of an employee’s pay for Social Security for each W-2 employee on a bi-monthly or monthly basis.
Is this a payroll tax credit?
No, the payroll tax postponement program is not a tax credit. If you’re looking for a CARES Act-sponsored tax credit, read more about the Employee Retention Tax Credit.
Are there any payroll tax suspension exclusions?
The payroll tax suspension excludes:
- Medicare taxes, or 1.45% of wages with no ceiling
- Social Security and Medicare taxes paid by the employee
Who qualifies for the payroll tax deferral?
All employers qualify for the payroll tax deferral – including self-employed workers (think freelancers or independent contractors). Qualifying small business owners can defer 100% of payroll taxes, while self-employed workers can defer 50% of the Social Security tax on their net earnings. What’s more, business owners can qualify even if they weren’t directly affected by the coronavirus.
When is the payroll (deferral) tax period?
The payroll deferral tax period is between March 27, 2020, and December 31, 2020.
When are deferred deposits due?
The deferred deposits must be paid on or before the following dates (to avoid any penalties):
- On December 31, 2021, 50% of the deferred amount.
- On December 31, 2022, the remaining amount.
Are there payroll tax delay exclusions?
Can any employer not qualify for the payroll tax delay? No, there are no current restrictions.
Note: Prior to rule changes on June 5, 2020, an employer who received a Paycheck Protection Program (PPP) loan that was later forgiven could no longer defer payroll taxes. Based on the new PPP Flexibility Act rules, having your PPP loan forgiven doesn’t impact your eligibility to delay your payroll tax.
Help with small business taxes
The CARES Act can be beneficial to many small businesses. It has the potential to help your business during a time of financial need.
Want help? That’s what we’re here for. Work with your tax pro to find out how you can obtain this deferral. Learn more about H&R Block Small Business Services.
How should you file taxes as an independent contractor? Learn more from the tax experts at H&R Block.
Taxes can be complicated for small business owners. Learn more about some of the best small business deductions to lower your tax bill with this list.
Keeping your workers on the payroll is the intention of the Employee Retention Tax Credit. Learn from H&R Block’s experts how this provision can help your business.
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