The CARES Act allows for multiple tax strategies for companies to manage cash flow during the COVID-19 pandemic. As discussed in a previous Schneider Downs Our Thoughts On article, CARES Act – Delay of Payment of Employer Payroll Taxes, the CARES act allows for a deferral of the employer-paid portion of the Social Security tax on wages paid between March 27, 2020 and December 31, 2020. This deferral allows employers to pay 50% of the balance by December 31, 2021 and the remaining 50% by December 31, 2022. Additionally, the CARES Act provides the Paycheck Protection Program. The “PPP” allows businesses to receive a 100% federally guaranteed loan to assist in keeping workers employed during the pandemic. The CARES Act had appeared to make the payroll tax deferral and PPP exclusive of each other. However, thanks to a new frequently asked questions section released by the IRS on Friday, April 10, 2020, we have a clearer idea of how the payroll tax deferral and the PPP will work together. The IRS will update the frequently asked questions section as additional questions arise.
Combining PPP and Employer Payroll Tax Deferral
Currently, the IRS FAQs include 11 questions, of which question 4 and question 9 provide particularly good guidance. Question 4 provides additional guidance on whether an employer can defer their share of social security tax without penalty if they have received a PPP loan that is not yet forgiven. An employer is not eligible for a deferral if they have indebtedness forgiven under the PPP. However, question 4 verifies that the employer may defer the amount up until the PPP loan indebtedness has been forgiven. As detailed in Schneider Downs’ article, Summary of the Paycheck Protection Program, this should allow for at least eight weeks of social security tax to be eligible to be deferred while the employer is waiting for the PPP loan to be forgiven.
Question 9 relates to self-employed individuals who must pay the combined employee and employer amount of the social security tax. Question 9 confirms that self-employed individuals will be eligible to defer the Social Security tax on wages paid between March 27, 2020 and December 31, 2020. As mentioned in our prior OTO article, this provision does not provide any relief in the form of tax credits, but it may help with cash flow management in the near term.
Please contact your Schneider Downs tax advisor if you have any questions or would like to discuss the provisions of the CARES Act.
Please visit our Coronavirus resource page at schneiderdowns.com/our-thoughts-on/category/Coronavirus for related content.
