April 27, 2020
Under the CARES Act, employers of all sizes can defer the remittance of the employer’s Social Security tax due between March 27 and December 31, 2020. Instead of remitting this tax along with other payroll taxes when normally due, employers can remit half of their Social Security tax by December 31, 2021, and the other half by December 31, 2022. Note that this deferral does not apply to the employer’s Medicare tax or to any federal taxes withheld from employees.
The CARES Act provides that this deferral benefit is not available for employers that obtain forgiveness of any portion of their Paycheck Protection Program (PPP) loan. However, in a frequently asked questions webpage updated by the IRS last week, the IRS clarified that this deferral opportunity exists UNTIL a forgiveness decision is made by the lender.
This means that until the employer applies for forgiveness and the lender decides that a portion (or all) of the loan is forgiven, employers can hold off on remitting their Social Security match. At that point, the employer must revert to timely remittance of these taxes. However, taxes deferred until that date can be paid by December 31, 2021, and 2022, as noted above.
Employers do not need to apply for this deferral opportunity. Instead, the amount is merely held back. The IRS will update Form 941 for the 2nd quarter of 2020 to track the deferred amounts. If you already remitted payroll taxes that were eligible for deferral under this rule, it may be possible to recover those and defer them as well.
If you anticipate receiving forgiveness on your PPP loan and you want to maximize this payroll tax deferral opportunity, you may want to carefully consider when you submit your application for forgiveness. You can determine the amount of forgiveness you are eligible for once you have had the loan funds for eight weeks, and you will likely also want to wait until after June 30, 2020. Since the initial loan payment is deferred for six months, you could benefit from additional deferral of your Social Security taxes by waiting a bit longer to apply for forgiveness. Keep in mind that lenders must respond to the loan forgiveness application within 60 days.
As an example, say you received PPP loan funds on April 20. The eight-week period used to determine your loan forgiveness amount will end on June 14. Since the first payment of any non-forgiven balance on the loan is not due until October 20 (six months from the date the funds are received), you could hold off on applying for forgiveness until August 15. Your lender would have up to 60 days to determine the amount of forgiveness, and you would know the amount of any remaining loan balance before the first payment was due.
While the deferral opportunity is significant, it is critical to keep track of the growing balance and to plan for that additional cash outflow ahead of the 2021 and 2022 due dates.
Do you and your business need help navigating these changing times? Contact JPS.
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