Payroll tax relief for small businesses and the self-employed: What to know

Self-employed woman looking up payroll tax relief on her computerImage: Self-employed woman looking up payroll tax relief on her computer

In a Nutshell

Federal coronavirus relief legislation allows businesses to put off paying their portion of Social Security taxes for up to two years. The deferral also applies to Social Security for self-employed people. But it’s only for 2020 payroll tax payments due after March 27.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

This article was fact-checked by our editors and Jennifer Samuel, senior product specialist for Credit Karma.

When you’re struggling to pay all your bills, being able to postpone a payment without penalty or interest may help you stay financially afloat.

That’s the underlying premise of the payroll tax deferral provision of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. The deferral aims to “enhance cash flow so that businesses can better maintain operations and payroll,” according to the U.S. Department of Treasury website.

The deferral applies to only a portion of payroll taxes due during a specific time frame, and there are other factors that may limit whether a company or individual can take advantage of the deferral. But many businesses, small businesses and self-employed individuals will be able to take advantage of the deferral to keep more money in their pockets during the coronavirus crisis and its aftermath. 

What is payroll tax relief?

As an employer, you’re generally required to deposit with the IRS the federal income tax — and employer and employee portions of Social Security and Medicare (FICA taxes) — that you withhold from employees’ paychecks. You can opt to do this quarterly, monthly or semi-weekly, depending on your payroll tax withholdings.

The payroll tax relief provided in the CARES Act allows employers to postpone making scheduled deposits of the employer portion of Social Security taxes — half of the total 12.4% that applies to the first $137,700 of each employee’s wages for 2020. 

The deferral doesn’t apply to the employee portion of Social Security, or any Medicare or income taxes (for employer or employee) — you’ll still have to pay those on schedule.

How does it work?

Instead of holding employers to their quarterly, monthly or semi-weekly deposit schedule, the CARES Act basically establishes a temporary, more generous schedule for depositing employers’ Social Security obligations. 

The act allows employers to make deposits that would otherwise be due during 2020 in two installments of 50%, due by Dec. 31, 2021, and Dec. 31, 2022.

But you can only defer payments that were due during a specific period in 2020 — which the act refers to as the “payroll tax deferral period.”

What is the payroll tax deferral period?

The payroll tax deferral period begins with the passage of the CARES Act and ends on Jan. 1, 2021. This means you can only defer payments that would have been due between March 27, 2020, (when the act became law) and Dec. 31, 2020.

The deferral does not apply to payments that were due before March 27, 2020, or to payments due after Jan. 1, 2021. So if you were behind on payments before March 27, 2020, or fall behind after Jan. 1, 2021, this payroll tax relief won’t help you.

Learn about the CARES Act

How do I pay the deferred tax?

Generally, employers report withholding amounts on Form 941, Employer’s Quarterly Federal Tax Return, and submit it with a payment voucher for any tax deposit they must make. Things will work a bit differently in 2020, although it’s not yet entirely clear how. 

On its payroll tax relief FAQs page, the IRS has said it would revise Form 941 for the second calendar quarter of 2020 and provide instructions on how employers should report the deferred deposits and payments. But the agency has also said that employers won’t have to do anything special to elect to defer deposits and payments.

The IRS will treat deferred payments as being timely as long as they’re paid according to the revised schedule, which means it won’t apply late-payment penalties to deferred amounts. To avoid penalties, employers must pay 50% of the deferred amount by Dec. 31, 2021, and the remaining 50% by Dec. 31, 2022.

How does this work for self-employed people?

The CARES Act also extends payroll tax relief to self-employed people, although it works a bit differently from employer payroll tax relief.

While employers and employees generally split in equal shares the 12.4% Social Security tax, people who are self-employed must pay the entire amount themselves. The CARES Act allows self-employed people to defer half of their Social Security tax on net earnings from their self-employment income between March 27 and Dec. 31, 2020.

What’s the benefit of payroll tax deferral?

Helping businesses maintain access to cash during the COVID-19 pandemic is a key benefit of many of the CARES Act provisions for businesses, such as the employee retention credit. The payroll tax deferral is meant to help businesses maintain the cash flow they need to continue operating and paying their employees, according to the U.S. Treasury Department.

“The payroll tax break lets businesses stretch a portion of their tax liability over two years,” says Christina Taylor, a director of operations at Credit Karma. “That could go a long way toward helping struggling companies keep some much-needed cash in their pockets.”

But, Taylor cautions, businesses should be sure to plan ahead. 

“They should set money aside as soon as they’re able, to help ensure they’ve got the funds needed to make the deferred payments down the road,” Taylor says. “Falling short or failing to pay on time when those payments come due could mean they’ll face IRS penalties.”

What else does the CARES Act do for businesses?

The federal government’s CARES Act …

  • Creates fully forgivable small-business loans through the Paycheck Protection Program
  • Establishes the employee retention credit, a refundable tax credit for some businesses

What’s the catch?

There are some.

  • If your small business received forgiveness for a Paycheck Protection Program loan, you won’t be allowed to put off depositing and paying your share of the Social Security tax that’s due after you get the notice of forgiveness.
  • You must meet deadlines for payment amounts — half by Dec. 31, 2021, and half by Dec. 31, 2022. You’ll need to make sure you have the funds to deposit the amounts due by those dates.
  • The deferral doesn’t count for payroll tax payments that were due prior to March 27, 2020, so if you were already behind when the pandemic hit, you’re still on the hook for those taxes.

Bottom line

If you qualify to take advantage of payroll tax deferral, it could help your small business maintain cash flow during the coronavirus crisis. The deferred payment schedule basically gives eligible employers two whole years to pay off the deferred amount. But you’ll want to be sure to have the money on hand to deposit with the IRS when the time comes.

Relevant sources: Deferral of employment tax deposits and payments through December 31, 2020 | U.S. Department of Treasury: CARES Act preserves jobs for American industry | IRS: Depositing and Reporting Employment Taxes | IRS Publication 15 (Circle E) Employer’s Tax Guide for 2020 |Social Security Administration: OASDI and SSI Program Rates & Limits, 2020 |IRS Form 941 for 2020: Employer’s Quarterly Federal Tax Return | Cornell Law School Legal Information Institute U.S. Internal Revenue Code | U.S. Department of the Treasury: CARES Act Preserves Jobs for American Industry 

Jennifer Samuel, senior tax product specialist for Credit Karma, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.

About the author: With nearly 30 years of experience in media, marketing, public relations and journalism, Evelyn’s written about nearly everything — from newspaper accounts of salacious capital murder trials to whitepapers on what typ… Read more.