IRS Clarifies Rules Allowing Limited Payroll Tax Deferral for Paycheck Protection Loan Recipients

The IRS recently updated it’s “frequently asked questions” providing new guidance to employers seeking deferral of employment tax deposits and payment under the CARES Act. Most importantly, this guidance clarifies that recipients of loans under the Paycheck Protection Program (“PPP”) are also eligible to defer payroll tax deposits subject to certain limitations.

Payroll Tax Deposit Deferral Under the CARES Act

The CARES Act allows all employers to defer the deposit and payment of the employer’s share of socialsecurity tax for the period beginning on March 27, 2020 and ending December 31, 2020 (“payroll tax deferral period”). The deferred deposits do not need to be paid until the “applicable dates”, which is 50% due by December 31, 2021 and the remaining balance due by December 31, 2022. The CARES Act includes an important exception for taxpayers receiving indebtedness forgiveness for any PPP loans. This exception seemingly prevented taxpayers receiving PPP loans from also participating in payroll tax deferral.

Payroll Tax Deferral Availability for PPP Loan Recipients 

The recent guidance from the IRS clarified that taxpayers may defer payroll tax deposits until the date the PPP loan is forgiven by the lender. Borrowers seeking loan forgiveness for PPP loans are required to submit documentation to their lender supporting that they used the funds for qualified expenses over an eight-week covered period and maintained workforce levels. Lenders have up to 60 days to determine the appropriate amount of loan forgiveness to be granted to the borrower. Depending on variables such as when PPP loans are funded and how long it takes the lender to approve forgiveness, borrowers may be able to defer 4 to 6 months of the employer portion of social security tax. Once they receive notification from the lender that their PPP loan is forgiven, taxpayers are no longer eligible to defer payroll taxes. However, the amount that was deferred prior to the date of loan forgiveness continues to be deferred and is not due until the applicable dates.

Payroll Tax Deferral for Self-Employed Individuals 

The IRS also confirmed that self-employed individuals may defer 50% of the social security tax on net earnings from self-employment income during the payroll tax deferral period. The repayments are due on the same “applicable dates” described previously.

To discuss the best options for you or your business, contact your Louis Plung and Company representative today at (412) 281-8771.