The Coronavirus Aid, Relief and Economic Security (CARES) Act provides employers with the opportunity to defer the employer portion of social security taxes (6.2 percent) on wages paid between March 27, 2020 and Dec. 31, 2020. The Act also provides that employers that have a Paycheck Protection Program (PPP) loan forgiven are not eligible for the deferral. Until recently, there was some uncertainty about what would happen to an employer that was deferring payroll taxes and then later had the PPP loan forgiven. Recent IRS guidance clarifies this issue with treatment that is favorable to employers.

In the Q&A released on April 10, the IRS states that any amounts deferred up until the date of PPP loan forgiveness can remain deferred until the applicable payment dates (50 percent due by Dec. 31, 2021 and 50 percent due by Dec. 31, 2022). This means that an employer will not be required to immediately pay back any previously deferred amounts if their loan is eventually forgiven; they merely cannot defer additional payroll tax beyond the date of forgiveness.

This is welcome news for businesses, as they can take advantage of the cash deferral of payroll taxes for a couple of months and receive the benefit of loan forgiveness.

Example

Company receives PPP loan funds on May 1, 2020. Company’s eight-week spending period for loan forgiveness will end on June 26, 2020. Company will then have 90 days to apply for loan forgiveness, which would be Sept. 24, 2020. Company’s lender will have until Nov. 23, 2020 (60 days) to determine whether Company’s loan will be forgiven.

Using this timeline, Company could potentially defer its portion (6.2 percent) of payroll taxes incurred from March 27, 2020 through Nov. 22, 2020 under the CARES Act provisions. Note that Company’s lender has up to 60 days to make a determination, so it is possible that the period for which payroll taxes can be deferred may be shorter.

If you have any questions, please reach out to GHJ’s COVID-19 Response Team to assist with any aspects of the CARES Act or other COVID-19-related issues.

Read more from GHJ Tax Expert Brett Crowell on Accelerate COVID-19-Related Disaster Losses under Section 165(i).