March 30, 2020
CARES Act: Can Your Business Benefit From Payroll Tax Deferrals?
Posted by Jenn McCabe
The recently signed Coronavirus Aid, Relief, and Economic Security (CARES) Act provides for payroll tax deferrals. Here are the basics of how this will work and what you need to consider.
Deferring Federal Employment Tax
Under the CARES Act, companies will be able to defer the 6.2% employer portion of Social Security tax for the period starting March 28 through December 31, 2020. This deferred tax amount will then be paid back over 2021 and 2022. (We expect further guidance on the mechanics within the next week and will provide updates as details come in.)
For a business with 100 employees, and an average employee salary of $50,000, the math is as follows:
100 staff x ($50,000 x 9/12 months) x 6.2% = $232,000
Both payroll processors and the IRS will need to adjust their forms and processes quickly. Even if they don’t adjust quickly (always a risk), there will be a process by which employers can claim a refund when they file their quarterly payroll tax Form 941.
States Are Following the Federal Example
We’re seeing states follow the federal lead. For example, the California Employment Development Department (EDD), as a part of their COVID-19 emergency response, will allow employers to defer their payroll tax deposits and filings for up to 60 days.
California quarterly tax filings are due no later than the last day of the first month of the subsequent quarter. Tax deposits are usually due sooner for all but very small employers. The CA EDD is allowing an additional 60 days for both form filing and tax paying, providing an extension request letter is submitted to them within that 60-day window.
- For first-quarter 2020 filings, the 60-day window starts on April 30, 2020, which is technically the last day payroll returns can be filed. Therefore, under the CA disaster relief provisions, you have until June 30, 2020, to file first-quarter 2020 payroll returns and deposit taxes providing you also submit a letter requesting the extension by June 30.
- Second-quarter 2020 tax deposits are delinquent after July 30, 2020. That means the forms/payments and the extension request letter are due by September 30, 2020.
- Do the math. State employer tax rates should be multiplied by the first $7000 of affected wages. It may be worth doing at the federal level and not be worthwhile at the state level.
A Word of Caution
Payroll companies may not support a payroll tax deferral. They may even drop a client who wants to take advantage of federal or state payroll tax deferrals. In this case, clients should be aware they would assume responsibility for deposits and filings for the rest of the year.
Payroll companies may also no longer offer products such as direct deposit if they aren’t handling the tax filings. Check with your payroll provider to discuss how they will manage payroll tax deferrals for the COVID-19 crisis.
If your payroll company isn’t helpful, you have options. Contact us for assistance with letter writing, supervising payroll processors, or filing amended payroll tax returns. For regulatory updates and other information on running your business through disruption, visit our COVID-19 Resource Center.
Jenn has more than 25 years of outsourced accounting and finance experience, with a particular expertise in startups and the advertising and creative production industries. She is passionate about seeing companies utilize the latest accounting technology to maximize their efficiency, productivity, and ultimately, success.
Before joining Armanino, Jenn founded and led Team Jenn Corp., a firm dedicated to the strategic financial management of startups and small businesses, offering a comprehensive back office solution with accounting, finance and HR solutions. Previous roles include stints at advertising giant Ogilvy and Mather, and in the cash management industry.
Jenn has a bachelor’s degree in economics from Pepperdine University and is a member of several professional associations including the National Society of Accountants, ProVisors and the Women’s Business Enterprise Network.