Larry Light, Senior Contributor
Oct. 9, 2020
The pandemic has brought a bunch of aid and tax breaks for Americans. To make sense of them, we consulted tax expert Bruce Bell, an attorney at the Chicago office of Schoenberg Finkel Beederman Bell Glazer.
Larry Light: Some small business owners believe that the new tax provisions, passed as economic relief during the pandemic, enable them to defer all of the payroll taxes incurred on the wages they pay to employees?
Bruce Bell: Not exactly. The deferral only applies to some of the payroll taxes that are paid on behalf of employees.
The Coronavirus Aid, Relief and Economic Securities Act, known as the CARES Act, extends the deadline for employers and self-employed individuals to pay a portion of the Social Security taxes that are imposed on earned income.
For employers, the extended due date applies to the employer’s share of Federal Insurance Contribution Act or FICA taxes on employee wages. For self-employed individuals, the extension applies to one-half of FICA taxes which are required to be paid on the earnings of a self-employed individual. The deferred payments can be paid over a two-year period, one-half of which must be paid by December 31, 2021 and the balance by December 31, 2022.
Light: Please describe who pays what.
Bell: Employers and employees are subject to payroll taxes on wages paid. The FICA portion of payroll taxes consists of a 6.2% tax which must be withheld from an employee’s wages, up to the current wage base of $137,700. Employers must match the 6.2% FICA tax and pay that amount as well. Medicare taxes of 1.45% are also imposed on employee wages and employers are required to match this amount as well. Self-employed individuals must pay both sides of the payroll tax, equivalent to both the employer share and the employee share.
The tax deferral under the CARES Act applies to wages paid in 2020 but it only applies with respect to FICA taxes, not to Medicare taxes. The tax deferral also applies to only the employer’s matching portion; the 6.2% tax imposed on employee wages still must be withheld from employees’ wages and paid to the government. The same holds true with self-employed individuals as the CARES Act tax deferral only applies to the equivalent of the 6.2% employer share of FICA taxes.
Light: What about when a business got a federal subsidy called the Payroll Protection Plan, or PPP? How does that work?
Bell: Many business owners have benefited from PPP loans, which the CARES Act made available to the business world. While labeled a loan, the indebtedness will be forgiven if the borrowed funds are used to pay payroll and other specified business expenses. As originally enacted, the deferred portion of the employer’s share of payroll taxes only applied if the employer was not the beneficiary of a PPP loan. Due to a subsequent legislative change, employers now qualify for the payroll tax deferral, even if they were recipients of PPP loans.
Light: I understand restrictions apply to a lot of the federal aid, but not all. What’s the story?
Bell : Many of the CARES Act and other favorable tax provisions have eligibility restrictions and benefit only certain size businesses, businesses with income below a certain level and businesses with only a certain number of employees. No such restrictions apply with respect to the payroll tax deferral under the CARES Act. Moreover, no special election is required to defer payment. Employers must simply defer payment as appropriate. Finally, although payments are extended, payroll tax returns must still be filed by the required due date.
Light: What’s a smart way for a business owner to plan taxes for this year?
Bell: From a planning perspective, you might consider accelerating some of your 2021 payroll to 2020. If, for example, you routinely pay bonuses in January of each year, you could pay them in December 2020. This will enable you to take advantage of the tax deferral, which will not be available for bonuses paid after Dec. 31, 2020.
Also, there’s the recently announced payroll tax deferral for employees earning less than $104,000 per year. The deferral applies to the employees’ share of FICA taxes. While the details continue to emerge, eligible employees can defer payroll taxes on their wages paid from Sept. 1, 2020, through the end of this tax year. The new incentive is simply a deferral and must be repaid by employees in 2021, meaning workers will face reduced paychecks in the future to repay the deferred taxes.
© 2020 Forbes Media LLC. All Rights Reserved
This Forbes article was legally licensed through AdvisorStream.