Companies worldwide are suffering a huge loss and are seeing a sharp decline in their sales due to the ongoing global pandemic. Though certain businesses are able to sustain, many small companies are struggling at this time to keep their employees on payroll and continue with their payroll taxes.
As a result of which, the federal government has passed several legislations for businesses to recover from the economic impact that the deadly virus has created. One such legislation that was launched to relieve small businesses from their nightmare of paying taxes during this crisis is the CARES Act (Coronavirus, Aid, Relief, and Economic Security). Let’s dig into details and learn more about the CARES Act enacted and its important component- Social Security Deferral Program.
The CARES Act: What is it?
In March 2020, U.S. lawmakers passed a bill called the CARES (Coronavirus Aid, Relief, and Economic Security) Act in an intention to help the business combat the economic downturn set in motion by the coronavirus pandemic. President Trump signed the bill into law on March 27, 2020. The CARES Act targets four key areas: U.S. households, small businesses, state/local governments, and larger businesses and financial markets. The $2 Trillion Cares Act can aid in rebounding the U.S economy.
What is the social security deferral program and how it works?
The CARES Act allows employers to defer the deposit and payment of the employer's share against Social Security taxes and for self-employed individuals to defer payment of certain self-employment taxes.
Generally, the employer pays Social Security taxes at a rate of 6.2% on the first $137,700 of wages paid to employees for the calendar year 2020. Now, under the CARES Act, such employers can defer the deposit and payment of the employer's portion for wages paid after March 27, 2020. So 50% of any taxes eligible for deferral are due on December 31, 2021, and the remaining 50% of such taxes are due on December 31, 2022.
Who are eligible for tax deferral?
All employers who paid their share of Social security tax to the employees can defer the deposit and there is no size threshold. However, section 1102 of the CARES Act (the Paycheck Protection Program (PPP) clearly states that employers those who receive a loan under the Small Business Administration Act, may not defer the deposit and payment of the employer's share.
An employer receiving a loan under the Paycheck Protection Program may defer deposit and payment of the employer portion of Social Security taxes as long as such loans have not yet been forgiven.
Once if the Paycheck Protection Program loan is forgiven, the employer may no longer defer any deposits or payments of the employer's portion of Social Security taxes that are due after the date of such loan forgiveness. Also, the employer portion of any Social Security taxes deferred prior to forgiveness of the Paycheck Protection Program loan stays deferred and is due on the Applicable Due Date.
When we say "All employers", it includes self-employed individuals as well. Self-employed individuals can defer the payment of 50% of Social Security tax on the net earnings from self-employment income for the period between March 27, 2020, and December 31, 2020.
Lost deduction for deferred taxes
A taxpayer can generally deduct the employer portion of any Social Security taxes or the employer portion of any self-employment taxes related to Social Security in the taxable year and such taxes are paid to the United States Department of the Treasury. Also, a taxpayer may elect to defer the employer portion of any Social Security taxes or the employer portion of any self-employment taxes related to Social Security, the taxpayer will not be entitled to a deduction for such taxes in the year 2020. Rather, when a taxpayer pays the deferred employer portion of any Social Security taxes or the deferred employer portion of any self-employment taxes in 2021 and 2022, the taxpayer will generally be entitled to a deduction in such taxable year.
The taxpayers should consider the relative benefits of deferral and compare it with the immediate deduction that could reduce the taxpayer’s 2020 taxable income or create a 2020 Net Operating Loss that is now eligible for carryback under the CARES Act.