How Does the Deferral of Payroll Taxes Interact with the PPP Loans?

The IRS recently issued further guidance on the deferral of payroll tax through the end of the year, which acts as an interest-free loan from the government to help businesses stay afloat during the COVID-19 pandemic.

There have been many questions about this deferral, specifically about how it interacts with the Paycheck Protection Program (PPP) loans that many businesses have applied for. Here is a quick overview of the details you need to know.

Let’s Rewind: A Highlight of the Payroll Tax Deferral

The payroll tax deferral option operates like an interest-free loan, giving your business immediate access to cash. You can defer the employer’s portion of Social Security tax, which is 6.2% of wages up to $137,700 in 2020. Half of the employer’s portion of each quarter’s Social Security tax payment and deposit is now due December 31, 2021. The remaining half is due December 31, 2022.

This deferral is available for any business or self-employed individual who has not had a PPP loan forgiven (further clarification on this in the section below), without any need-based eligibility.

The New Guidance: Interaction of Payroll Tax Deferral and PPP Loans

The new guidance from the IRS stated that employers who applied for and received a PPP loan could continue to take advantage of this deferral until their bank issues a decision that the loan is forgiven.

So, businesses can defer deposits and payments of the employer’s portion of each quarter’s Social Security tax beginning on March 27, 2020, and ending on the date that the loan forgiveness decision is issued. Businesses will not incur failure to deposit and failure to pay penalties during this time frame, and the amount of deferred payroll tax through the date of the PPP loan forgiveness will continue to be deferred until the payback dates (December 31, 2021, and December 31, 2022).

Once your PPP loan has been forgiven, you are no longer eligible for this deferral option.

Want to Know More about the Interactions between Relief Options? We Have You Covered

We recently shared this chart of business relief options to help you navigate your options and eligibility. Make sure you know and understand the rules, along with the limits of utilizing them at the same time.

If you have any questions, please don’t hesitate to reach out to us. We are here to make the complex simple for you during these difficult times.

Click here to visit our COVID-19 Resource Center for more valuable insight.