What Is the Employer Payroll Tax Deferral Provision?

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What Is the Employer Payroll Tax Deferral Provision?

President Joe Biden signed the American Rescue Plan Act into law on March 11, 2021, a $1.9 trillion bill that extends many forms of federal assistance for small businesses impacted by the coronavirus pandemic that were first introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The employee retention credit and the employer payroll tax deferral are two of these measures. These are similar yet provide separate functions. The employee retention credit allowed businesses to claim a payroll tax credit of up to $10,000 per full-time employee per quarter until January 1, 2022, while the employer payroll tax deferral allowed your company to defer paying some payroll taxes due in 2020 by paying half of those taxes at the end of 2021 and the other half at the end of 2022.

Key Takeaways

  • Employer payroll tax deferral was available to almost all enterprises and self-employed persons.
  • The provision allows you to postpone payment of the employer portion (50%) of Social Security taxes on income received between March 27, 2020, and December 31, 2021.
  • This payroll tax deferral did not qualify as a payroll tax credit. Another program will cover the credit.

Only for Employer Portion of Social Security Taxes

The credit and deferral apply to the employer component of Social Security taxes (6.2% of earnings). If you were self-employed, you might delay payment of 50% (6.2%) of the 12.4% Social Security self-employment tax. It was not possible to postpone payment of Medicare taxes (2.9%) or the employee component of Social Security taxes (6.2%).

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You Could Defer Payments in Advance of Credits

In addition to the terms of the employee retention credit and credits awarded under the Families First Coronavirus Response Act, the payroll tax payment deferment was allowed (FFCRA).In other words, you might postpone payment of your (employer) share of Social Security taxes (6.2% of salaries) for all workers paid between March 27, 2020, and December 31, 2021.

With one exception, you might initially continue to delay any payments not covered by either the FFCRA credit or the employee retention credit. If you got a forgiving loan via the Paycheck Protection Program (PPP), you could not delay payment until you were advised that the loan had been forgiven. The Paycheck Protection Program Flexibility Act of 2020, which went into effect on June 5, 2020, repealed the exclusion.

Near-Universal Eligibility

Unlike the credit, the deferral was available to practically all firms and self-employed persons, regardless of whether they were impacted by COVID-19. Employers did not need to vote on the deferment.

To optimize your access to this provision and prevent fines for late tax deposits, you required to understand two rules:

  • Even if you appoint an agent to deposit employment taxes on your behalf, you are still responsible for prompt payment.
  • You must deposit 50% of deferred taxes by December 31, 2021, and the remaining balance by December 31, 2022, or risk hefty penalties.

Accounting for Your Deferral

For the second, third, and fourth quarters of 2020, Form 941, Employer’s Quarterly Federal Tax Return, was changed to reflect the employer’s deferral of the employer’s part of Social Security tax.

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Form 1040-ES is used to submit estimated taxes if you are self-employed. Estimated 2020 payments that were due on April 15, 2020 and June 15, 2020 have been pushed back to July 15, 2020, to meet with the new federal income tax deadline. If you wanted to delay 6.2% of your Social Security taxes from March 27, 2020 to December 31, 2020, you could subtract that amount from your total taxes owed and change your quarterly payments appropriately.

Employer Payroll Tax Deferral vs. Employee Retention Credit

Deferring payment of your company’s share of Social Security payments has fewer limits than earning full refundable credit on those taxes. The table below depicts the key distinctions between the two clauses.

Payroll Tax DeferralPayroll Tax Credit
EmployersAllPartial or full closure by law
Significant decline in gross receipts
EmployeesAll100 or more full-time, not working
> 100 full-time, working or not
Self-employedAllNone
TimelineMarch 27, 2020, to Dec. 31, 2021March 13, 2020, to Dec. 31, 2021
Taxes affectedEmployer portion of SS taxesEmployer portion of qualified SS taxes
ActionDeferralRefundable credit
Taxes due50% Dec. 31, 2021; 50% Dec. 31, 2022None + potential refund
Impact of PPP LoanNoneNo credit if loan received
Impact of FFCRANoneNo credit for FFCRA credits

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