IRS Issues New Guidance for Payroll Tax Deferral

Friday evening the IRS issued much anticipated guidance on the payroll tax deferral component of the CARES Act. As we discussed previously, this provision allows companies to defer payment on the company match of the Social Security tax (6.2%) for company payroll starting March 27th, 2020 through December 31, 2020. The first 50 percent of this deferral will need to be paid back by December 31, 2021 and the remaining 50 percent paid back by December 31, 2022. Thus, this tax deferral can be viewed as a 2 year interest-free loan that gives companies immediate liquidity.

Under the original text of the CARES Act, it was unclear whether companies that applied for a Payroll Protection Program (PPP) loan were also eligible for payroll tax deferral. The original text of the Act said that a company cannot take payroll tax deferral if it has loan forgiveness under the PPP loan program. This language was confusing and not very clear regarding the applicability for companies that have already applied for a PPP loan.

Under the new guidance released Friday, companies that have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan without incurring failure to deposit and failure to pay penalties.

Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred, and will be due on December 31, 2021 for the first 50 percent of the deferred amount and on December 31, 2022 for the remaining amount.

This new guidance is welcome relief for businesses seeking additional short-term liquidity beyond a PPP loan. Businesses can begin utilizing this payroll tax deferral right away, and the deferral is retroactive to payroll starting on March 27, 2020. Therefore, for a business that has applied for a PPP loan, the period for which it can increase its deferral of these payroll taxes can be at least 10-12 weeks (assuming retroactive payroll and a June 30, 2020 loan forgiveness date).

If you need assistance with this or any other tax or COVID-19 related matters, please contact your Kreischer Miller relationship professional or any member of our team. We also continue to update our COVID-19 Resource Center, which you can access here.

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