The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contained a provision allowing employers to defer payment of their required 6.2% portion of the Social Security tax on an employee’s wages, up to the taxable wage base of $137,700 for 2020. The provision applies to payroll taxes incurred from March 27, 2020, through December 31, 2020, and breaks the payment of the deferred amount into two payments. The initial payment of 50% is due by December 31, 2021, and the remaining 50% is due by December 31, 2022.
Because a great deal of what we are hearing on payroll tax deferral lately pertains to Trump’s payroll tax deferral, it is important for us not to lose sight of the tax implications associated with the CARES Act payroll tax deferral. In terms of claiming a deduction, for example, employers must carefully consider when these payments should be made based on their chosen overall method of accounting.
Cash v. Accrual Basis
For taxpayers using the cash basis method of accounting, the deduction will be taken against income in the year the payment is made. Calendar year filers would need to actually pay the deferred payroll taxes no later than December 31, 2020 (by year-end 2021 for fiscal filers), in order to claim a deduction on their 2020 tax return; otherwise, the deduction will only apply to the future year in which the taxes are paid.
For taxpayers using the accrual basis method of accounting, liabilities are deductible when they are determinable and when economic performance has occurred. For payroll taxes, this generally means when the taxes are paid. But, accrual-basis taxpayers may be able to employ the Recurring-Item Exception to their advantage.
Taxpayers using the accrual basis may be able to defer payment of these payroll taxes for a longer period and still be able to claim a 2020 deduction, which is more meaningful for those expecting losses in 2020 that will be carried back to years with higher taxes.
To use the Recurring-Item Exception, the four following criteria must be met.
- All events have occurred that establish the liability.
- Economic performance must occur on or before the earlier of:
- the date the return is due (including extensions), OR
- the 15th day of 9th month after the close of the year (September 15th for calendar filers).
- The liability must be recurring in nature.
- The liability is either
- immaterial, OR
- yield better matching results in relation to income.
Making a Strategic Plan
If you are using the deferral, you use the accrual basis method, and you have not elected the Recurring-Item Exception for payroll taxes prior to this year, consider evaluating whether a change in accounting method is the best option. Since the presidential election, there has been a lot of talk about tax rate increases to come, so you should also weigh the potential benefits of deferring payment to gain a deduction at a higher tax rate.
Whether you have questions, need assistance with a strategic plan, or need to file for a change in accounting method, contact us today. ARB is dedicated to helping clients get desired results based on their circumstances.
Check out other ARB business tools and resources, such as our 13-Week Cash Flow Analysis tool and our PPP Loan Forgiveness Workbook. Visit our COVID-19 Financial Resource and Tax Center for information on related matters.
by Robin Cyr, CPA, MST, JD
Robin Cyr joined ARB in 2010. She is a Director in Tax, specializing in providing comprehensive tax compliance and consulting services to corporate and individual clients. Robin primarily serves industry leaders in the manufacturing, construction, and nonprofit sectors. As both a CPA and a lawyer, she provides exemplary tax and consulting services related to estate and succession planning.