Many business owners have faced a wild ride over the last few months. Each day seems to bring new rules and new challenges. Some business owners have managed large-scale transitions to keep operating, while others have had to shut down indefinitely.
In this shifting environment, it’s only natural there are plenty of questions about what your obligations are as an employer. You may be looking for ways to keep employees on payroll, albeit with reduced hours. You might have questions about sick leave, compensation, and so much more.
What about payroll taxes? If you have U.S. employees, you know that you’re required to withhold taxes and remit them to the IRS on behalf of those workers.
Payroll taxes represent both a financial and administrative burden for many employers. That reality has only been more pronounced over the last few weeks. Tax deferrals have been introduced, which may be able to help.
The CARES Act Allows Deferrals
The Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) is designed to bring relief during this uncertain period. Business owners who have had to close up or have seen their sales fall are facing a cash crunch. Certain provisions in CARES are meant to address this growing issue.
Employers in the U.S. shoulder a portion of Social Security and Medicare payments on behalf of their employees. Both employees and employers are responsible for around six percent of Social Security, for example. Under CARES, the employer could defer the payment of their portion of Social Security, which is 6.2 percent up to the wage base amount of $137,700 for 2020.
It should be noted that the deferral does not apply to the employee’s portion of the Social Security tax or the 1.45 percent tax for Medicare. The deferral option is not available if you had debt forgiven under the CARES Act for certain SBA loans, such as the loan under PPP.
If they haven’t had debt forgiven under the CARES Act, employers don’t need to pay the Social Security tax right now. If your business is handling a cash crunch, that could help to alleviate the issue. Instead of being forced to pay these amounts to the government, you can use them to pay for goods, put them toward rent or loan payments, or other necessary bills to keep your business operating.
The FFCRA Allows Deferral of Employee Payments
What about the other portion of Social Security and Medicare? These payments are collected and withheld from your U.S. employees’ paychecks.
The Families First Coronavirus Relief Act (FFCRA) allows you to defer these payments from specific qualified FFCRA sick leave pay, and it doesn’t cover all employee wages. Again, this can allow you to use the cash you have on hand to keep the business operating.
Your next question is likely which businesses are eligible to defer taxes. Almost any business can defer Social Security and Medicare taxes. The exception is if you’ve received a Paycheck Protection Program loan. If you received one of these relief loans, you are expected to continue paying.
In other cases, any tax payment due after March 27, 2020, may be deferred. Payments to December 31, 2020, are eligible for deferral.
The IRS has issued guidance which suggests there will be no penalties associated with deferring payments. That means you won’t be assessed late payment fees or failure to pay penalties for deferred tax payments between March 27 and December 31, 2020.
Deferred Taxes Must Still Be Paid
One thing business owners, accounting officers, and payroll managers must be aware of is that they will be expected to pay the deferred taxes eventually. The government has outlined a plan for the payment of deferred taxes from 2020 through 2021 and 2022.
Deferring taxes now may seem like a good way to counter an immediate cash crunch and keep the lights on. You must weigh this option carefully, however, as it will increase your tax burden in the future. Can your business handle 9 or even 12 percent payroll tax payments?
If you have the cash now, the best bet is to pay it. Even paying part of your payroll tax obligation will help you manage. Deferral can be a useful tool, but using it wisely will be the key to continued success for your business.