Payroll tax deferral OK with PPP loan – but be careful

The ability to defer certain payroll taxes for employers who received a PPP loan is one of the benefits of the recently enacted Payroll Protection Program Flexibility Act.

When the CARES Act first passed in April, employers had the option to defer paying the employer portion of Social Security tax through the end of 2020, with all 2020 deferred amounts due in two equal installments: one by December 31, 2021, and the other by December 31, 2022.

At the time, however, small businesses that applied for and received a Paycheck Protection Program loan through the CARES Act, were not permitted this option of payroll tax deferral once the debt was forgiven.

On June 5, the PPP Flexibility Act was signed into law, which made a number of retroactive improvements to the PPP forgiveness criteria. Guidance continues to emerge on the specifics of those changes, and on June 26, the IRS clarified that “an employer that receives a PPP loan is entitled to defer the payment and deposit of the employer’s share of Social Security tax, even if the loan is forgiven.”

This is good news for employers, but we offer a cautionary note: payroll taxes are not something to be treated lightly, and the government will be vigorous in pursuing and penalizing employers who do not pay those taxes in full. Remember, this is only a deferral, meaning the taxes will still be owed. If you do decide to defer the taxes, it is a good idea to set aside the funds in an interest-bearing or other short-term investment account so that you will have the funds available when the taxes are due.  We recommend speaking with your tax adviser before deciding whether to take advantage of this option.

Nicole Bishop is a BTAG Manager with Antares Group, Inc. She can be reached at nbishop@antarescpas.com.