Smart Tax Planning

Coronavirus relief bill gives small businesses more time to cover payroll taxes

Key Points
  • The recently-passed coronavirus relief act grants employers the option of deferring their share of this year’s Social Security payroll taxes until next year and 2022.
  • Payroll taxes are shouldered by workers and employers: Each pays 6.2% toward Social Security and 1.45% toward Medicare.
  • While deferring payroll taxes in the present may provide businesses with cash on hand, they must consider whether paying those taxes later might come back to bite them.
(L-R) Senate Majority Leader Mitch McConnell, Secretary of Treasury Steven Mnuchin, and Senate Minority Leader Chuck Schumer hold a meeting to discuss a potential economic bill in response to the coronavirus, COVID-19, in Washington, DC, on March 20, 2019.
Saul Loeb | AFP | Getty Images

Small businesses facing payroll tax payments will get some relief from Congress – the option of deferring payment to Uncle Sam until next year.

In particular, the $2 trillion coronavirus relief bill will permit small businesses to defer their share of Social Security payroll taxes in 2020. Payroll taxes are shared by workers and their employers, so that each pays 6.2% toward Social Security and 1.45% toward Medicare.

Sole proprietorships would also qualify.

The relief package passed on Friday afternoon.

Firms that defer their Social Security payroll taxes will have until the end of 2021 to pay the first half of the deferred levies. The remaining tax liability will be due by Dec. 31, 2022.

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This is just one of many provisions aimed at small businesses in the bill.

Lawmakers also included a loan program that will allow companies to borrow up to $10 million to help pay employees and cover other expenses – and an employee retention credit to incentivize firms to keep workers.

But while tax deferral provides immediate relief to companies this year, experts are concerned that those levies could pile up and strain firms' balance sheets, especially if a recession is ahead.

"The concern, especially with small businesses, is that you can pile up an awful lot of tax debt in nine months," said Pete Isberg, vice president of ADP, a payroll company in Roseland, N.J.

"It gets to be a significant amount if you're a mid-sized or a small business," he said. "You generate a perception of an insurmountable debt for some folks if they're not careful."

Freeing up liquidity

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At first blush, deferring payment on 6.2% of wages may not sound like much, yet it adds up over time.

A small business that pays an employee $1,000 in weekly wages could save $2,418 over the remainder of the year, said Stephen Dombroski, senior payroll tax compliance manager at Paychex in Rochester, N.Y.

"The intention is to allow the employer to have access to those funds to be able to pay employees and people on staff," he said.

Employers are still on the hook for paying the 1.45% of wages that goes toward funding Medicare.

Is it right for you?

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Deferral is only one part of the package of relief measures. Many small businesses won't be able to go it alone.

"The way that everything is evolving, you'll need to consult with three different professionals to get the best advice," said Tony Nitti, CPA and partner with RubinBrown in Denver.

"You'll need a banker to talk about the loans, an employment attorney to talk about paid leave requirements and a tax person to talk through the tax aspect," he said.

Figuring out whether deferment makes sense requires also requires some degree of prognostication by small business owners: Will they be able to set aside the money needed for the taxes? Can they pay the deferred 2020 levies concurrently with their 2021 and 2022 payroll obligations?

"Imagine if your income or your gross receipts go away?" said Jeffrey Levine, CPA and director of advanced planning at Buckingham Wealth Partners in Long Island, N.Y.

"Having money today is good, but it's important for businesses to keep in mind that the last creditor you want to owe is the IRS."

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