The Coronavirus Aid, Relief, and Economic Security Act (Act) contains several business relief provisions, including an employer payroll tax deferral (Deferral) and a companion provision allowing an employee retention credit (Credit). A brief overview of the Deferral is included in our CARES Act Reference Guide (see p. 9) and a detailed analysis of the Credit is included in a separate alert. The following is our detailed analysis of the key aspects of the Deferral.
The Act allows for a deferral of “applicable employment taxes” and it appears that the Deferral can be used in conjunction with the Credit when the Credit does not result in a refund. As in the case of the Credit, the applicable employment tax for Deferral purposes is the employer portion of the Social Security tax (6.2 percent of wages), and in the case of a self-employed individual, the applicable employment tax is 50 percent of the self-employment tax based on 12.4 percent of self-employment income. As such, the Deferral does not apply to employee income tax withholding, the employee or employer portion of the Medicare tax, or the employee portion of the Social Security tax.
Unlike the Credit, the Deferral is not based on the taxpayer meeting eligibility requirements. The Deferral applies to the applicable employment taxes for the period from the date of enactment of the Act (March 27, 2020) and through December 31, 2020. The payment of the tax is deferred, with 50 percent of the tax payable on December 31, 2021 and the remaining 50 percent of the tax payable on December 31, 2022. This is a significant benefit, but as noted above, it only relates to the Social Security tax (6.2 percent of wages) portion of the overall employment or self-employment tax.
There are several special Deferral rules:
The availability of the Deferral is an important aspect of the Act and employers should evaluate whether they can benefit from this tax provision.