The CARES Act offers all employers an interest free loan. We encourage you to take it. Specifically, all employers can defer payment of the employer portion of social security taxes otherwise due between March 27 and December 31. (CARES Act § 2302(a).) Half of the deferred taxes are due by December 31, 2021, with the other half due by December 31, 2022. (CARES Act § 2302(d)(3).) As we discussed in a prior legal update generally summarizing this provision, this is effectively an interest-free loan of 6.2 percent of all wages paid in 2020 from around March 27.
However, the text of the CARES Act made it unclear how this benefit provision worked with the payroll protection program (PPP) loans. The statute provides that the deferral provision “shall not apply to any taxpayer if such taxpayer has had [PPP loan] indebtedness forgiven.” (CARES Act § 23012(a)(3).) Thus, an unknown future event (forgiveness of a PPP loan) had the potential to impact a benefit in ways that were not clear. Based on the statutory language, we were concerned that:
- Deferral never applied if a taxpayer had a PPP loan forgiven, rendering taxpayers late on their payment of the employer portion of social security taxes, even though they deferred payment at a time when they had no way of knowing if they would even get a PPP loan. Given the fact that PPP loans have already reached the $349 billion allocated, this seemed like an especially harsh trap.
- Deferral ceased to apply once the taxpayer has had a PPP loan forgiven. This seemed like a more reasonable approach, effectively accelerating the deferral to the date of forgiveness. It would also mean that the term of the interest-free loan would only be about 10 weeks from most taxpayers.
As has been a general theme that has emerged with the administrative interpretations of the CARES Act, the guidance for deferral issued by the IRS provides more relief than anticipated. Pursuant to FAQ 4 of the guidance, PPP loan forgiveness only prevents deferral of payment obligations subsequent to “the date the lender issues a decision to forgive the loan” (the “Forgiveness Date”). Deferral of the employer portion of social security taxes prior the Forgiveness Date remains deferred until December 31, 2021 (half) and December 31, 2022 (other half).
Deferring the employer portion of social security taxes is a good plan for any business concerned about cash flow. For those anticipating forgiveness for some of their PPP loan, however, this benefit is only available for amounts payable before the Forgiveness Date. The only ongoing issue is to ensure timely payment of the deferred payroll taxes. Businesses should document the decision to delay payment and make sure funds will be available to pay the deferred social security taxes. For more information about why documentation and payment provisions are important, see our prior legal update on the topic, referenced above.