Deferring payroll taxes can give your company extra liquidity at no cost

This article has been updated as of 6/18/20. You can view the most recent version HERE.

All companies, even those that apply for Paycheck Protection Program (PPP) loans, are eligible for an added benefit – they have the ability to potentially free up thousands of dollars by deferring their employer’s share of Social Security tax over two years.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, businesses are eligible to defer their 6.2 percent share of Social Security tax paid for each worker from the date the Act became law on March 27. Recent IRS guidance offers clarity for those businesses that will receive forgiveness under a PPP loan.

Companies that do not obtain a PPP loan or have none of that loan forgiven, must resume paying the employer share of worker’s Social Security tax after December 31, 2020.

Companies that do obtain forgiveness under a PPP loan, must resume paying the employer share of worker’s Social Security tax on the date the lender issues a decision to forgive the loan.

Remember, the intent behind PPP is helping businesses with 500 or fewer employees stay afloat and keep workers on the payroll. Allowing companies to delay paying potentially thousands in Social Security payroll taxes is an added way to ensure they have additional capital to cover costs.

How it works

From the date a business receives its PPP loan funding, it has eight weeks to spend the money according to CARES Act guidelines – paying for salary and benefits, as well as interest on mortgage obligations, rent and utilities.

After the eight-week period ends, businesses will have to submit paperwork to their lender verifying they used the loan for allowable and forgivable expenses. All of the loan is potentially forgivable if the expenditures meet the guidelines (salaries, etc.)

After receiving the business’ paperwork detailing how it spent the PPP money, the lender has up to 60 days to let the company know how much of the loan qualifies for forgiveness. The day the business receives that notification is the day the business must resume paying its 6.2 percent of the employer’s share of the Social Security payroll tax.

Businesses have to pay 50 percent of the deferred tax amount by Dec. 30, 2021 and the remaining 50 percent by Dec. 31, 2022 – essentially making the deferment an interest-free loan.

As an example, let’s look at a business we’ll call XYZ Inc. that has a $16,130 weekly payroll, meaning it has a weekly employer share of Social Security payroll tax of $1,000 ($16,130 X .062 [employer share of Social Security tax] = $1,000).

Here is how XYZ Inc. can benefit from deferment:

• The CARES Act becomes law on March 27 and XYZ starts deferring its weekly $1,000 employer share of Social Security payroll tax at the start of its next pay period on March 30.
• XYZ submits its PPP application to its lender on April 3 and receives its funding on April 15. XYZ has eight weeks, until Jun. 10, to use the PPP loan money for allowed expenditures.
• On Jun. 11, XYZ submits paperwork to its lender detailing how it spent the money so the lender can determine loan forgiveness.
• The lender has up to 60 days – in this case, the lender contacts XYZ, Inc. on July 31 – to let them know how much of the PPP loan is forgiven. After receiving the forgiveness notification, XYZ must resume paying its employer share of Social Security payroll tax with its following pay period on Aug. 1.
• Over the 18 weeks – from March 28 until July 31 – XYZ has deferred $18,001.08 in employer Social Security payroll taxes. (Total payroll expenses of $290,340 X .062 = $18,001.08.)
• XYZ must pay the first half of the deferred taxes, or $9,000.54, by Dec. 30, 2021 and the second half by Dec. 31, 2022.

Now suppose that XYZ Inc. applied for a PPP loan but never received the money or was not eligible for a PPP loan due to size or other reasons. (As of this writing, the PPP loan program has run out of money. While lawmakers are discussing adding more funding, there are many businesses with pending applications.) In these cases,

• The CARES Act becomes law on March 27 and XYZ starts deferring its weekly $1,000 employer share of Social Security payroll tax at the start of its next pay period on March 30.
• XYZ continues deferring its $1,000 weekly employer share of Social Security payroll tax until the end of the year, which is allowed under the CARES Act – which would equate to 40 weeks.
• XYZ essentially has a $40,000 interest-free loan, the first half which must be repaid by Dec. 30, 2021 and the second half by Dec. 31, 2022.

Bottom line

Calculating loan forgiveness and ensuring PPP money is spent correctly can get complicated and we suggest contacting your CPA for assistance. We also recommend placing the loan money in a separate account to make tracking expenditures easier for loan forgiveness.

The Boyer & Ritter team is keeping track of the latest information and guidance. We’re here to work with you and your company to ensure you get the full benefits provided by the CARES Act and any other changes made by federal or state governments during and after the coronavirus pandemic.

If you have questions regarding related COVID-19 laws and regulations, please refer to the resources available at www.cpabr.com.