What is the Payroll Tax Deferral? (CARES Act Guide)

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act established by the Trump administration in early 2020, it was determined that all employers would be allowed to defer the payment of specific 2020 payroll taxes until the end of December in both 2021 and 2022. With the end of 2021 less than two months away, many businesses are likely wondering what this will mean for the next tax season. 

Please continue to learn about everything your business will need to know as we approach the first deadline in December 2021 and move into the new year. And if you’d like any additional assistance in determining your future business taxes and the various tax credit benefits that may be available to you, please get in touch with the industry experts at Parachor Consulting for more information. 

Related: Business Startup Costs & Tax Deductions 2021 [Guide]

Specifics of the CARES Act Payroll Tax Deferral Provision

The payroll tax deferral provision of the CARES Act established that all United States employers (including government entities) would be permitted to defer the payment of their share of Social Security taxes on employee wages for up to two years. Specifically, the deferral states that payments normally due between March 27 and December 31 of 2020 could be deferred with 50% of the amount paid by December 31 of 2021. The other 50% would then be required by December 31 of 2022. 

This deferral comes as part of the Act’s payroll tax relief program and only applies to employer Social Security taxes. It does not apply to either tax withholdings from employees or Medicare taxes. Employers were required to report their deferral of these taxes on Form 941 during the March through December 2020 tax period when the taxes would have otherwise been due for submission.

Taxpayers that utilized the payroll-tax deferral of the CARES Act should be aware that they may receive a higher than anticipated income tax bill for 2020 because of the disallowed payroll tax deduction. That said, taxpayers should be able to preserve significant amounts of their 2020 reduction while still obtaining a significant payroll tax deferral through careful planning. However, they may wish to invest in the services of an expert tax solutions provider.

Do you need the help of an expert full-service tax credit solutions provider to help you find the maximum tax benefits possible for your business? Reach out to trusted industry professionals here at Parachor Consulting today.

What Does This Mean for Accrual-Basis Taxpayers?

In general, tax liabilities for accrual-basis taxpayers are deductible when the liability is both fixed and determinable (often referred to as the all-events test), and the economic performance involved has occurred. Payroll taxes will be considered fixed and determinable once an employee performs a service relating to their compensation. The employer’s overall economic performance will be fully satisfied once the taxes are finally paid.

A Note for Accrual-Basis Taxpayers: The Recurring-Item Exception

Taxpayers that utilize the recurring-item exception may deduct liabilities for tax years in which all of the following conditions are considered valid:

  1. The all-events test is met by the end of the year.
  2. The economic performance occurs earlier than when the return is filed, or eight and a half months after the year’s end.
  3. The liability is classified as recurring in nature according to the requirements of the recurring item exception.
  4. The liability is considered either immaterial or better matching results, with the matching requirement deemed met for tax purposes.

Taxpayers utilizing the accrual-basis method may benefit from the recurring-item exception for the payroll taxes covered in the CARES Act.

A Note for Accrual-Basis Taxpayers: Accounting Method Changes

There’s one particular factor that accrual-basis taxpayers should note. Should they apply for the recurring-item exception during the tax period denoted in the CARES Act but have not previously done so in their payroll taxes in earlier years, they may be required to file for a method change. Said change is considered eligible for automatic consent under Review Procedure 2019-43.

Related: Form 7200 Instructions 2021: Step-by-Step Guide

What Does This Mean for Cash-Basis Taxpayers?

The process is more straightforward concerning cash-basis taxpayers, as payroll taxes are automatically deductible when paid. These taxpayers may determine the year when they apply the tax deduction against their accrued income. However, to claim the deduction for the year in which an employee provides their services relating to these taxes, employers would need to deposit their payment earlier than is required by the CARES Act. That said, these employers may still receive a significant deferral for their required tax payment. 

Calendar year-end taxpayers are permitted to deduct their taxes on their 2020 return if they were paid by the end of December 2020. Fiscal year-end taxpayers may delay their payment until the end of 2021. However, they will be required to assess the tax implications of any amount due between March 27, 2020, and the end of the 2020 fiscal year if the payment occurs after that date.

Related: Employee Retention Credit (ERC): Complete Guide

The Bottom Line: What Parachor Consulting Can do to Help

Taxes are a complicated, time-consuming, and frustrating process that can be very difficult for many business owners to navigate, especially when they choose to utilize the payroll tax deferral permitted by the CARES Act. If you not only want to ensure that you’re filing your taxes correctly but also making use of all the tax benefits and deductions you’re eligible for.

Are you in need of some specialized tax credit assistance for your business from an industry professional dedicated to getting you the tax benefits you deserve? Please feel welcome to reach out to us for any tax consulting or tax credit advisory you need.

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