What is the employer payroll tax deferral provision?

The American Rescue Plan Act was signed into law in March 2021, designed to provide financial assistance to those affected by the global pandemic. Among the provisions included in the bill is the employer payroll tax deferral executive order, and if you’re a small business owner it’s important to know what this entails and how it can benefit you and your business. 

Employer payroll tax deferral is a separate provision from payroll tax credit, but business owners in the US are now able to benefit from both initiatives, as well as a number of other schemes designed to help businesses in the US survive the pandemic, such as paid sick leave and paid family leave credit.

What is the employer payroll tax deferral provision?

The employer payroll tax deferral provision allows US businesses to delay paying employer payroll taxes that were due in 2020. Under this scheme, business owners must pay half of these taxes by the end of 2021, and the remainder by the end of 2022. The deferral applies to certain wages paid between March 27, 2020 and December 31, 2020.

The employer payroll tax deferral provision offers wider eligibility than payroll tax credit; almost every business and self-employed individual in the US is eligible for this scheme.

The deferral applies only to the employer portion of Social Security tax (6.2% of wages). Payment of Medicare taxes (2.9%) and the employee portion of Social Security taxes (6.2%) are not able to be deferred under the employer payroll tax deferral provision.

Eligibility for deferral of employer payroll taxes

This Social Security tax deferral is available to almost all businesses and self-employed individuals in the US, regardless of how they were impacted by COVID-19. Employers can face large penalties for not paying employment taxes in a timely manner and for not depositing at least 50% of deferred taxes by December 31, 2021, and the remaining half by December 31, 2022.

While initially, payroll tax deferral was unavailable to those who had received Paycheck Protection Program (PPP) loans and other payroll tax credits, the Paycheck Protection Program Flexibility Act did away with this rule. Employers who received PPP loans are now eligible for payroll tax deferral, even after their loan has been forgiven.

Payroll tax deferral accounting

The Employer’s Quarterly Federal Tax Return form (Form 941) has been revised to reflect the payroll tax deferral. Self-employed individuals file taxes using Form 1040-ES, and can deduct 6.2% of Social Security taxes based on estimated earnings from March 27-December 31, 2020.

Payroll tax deferral vs. employee retention credit

Employee retention credit is a separate provision included in the American Rescue Plan Act. While they offer similar support, the two provisions do differ in terms of eligibility, taxes affected, and more.

Payroll tax credit offers refundable credit to businesses, but not self-employed individuals, and this credit goes towards the employer portion of qualified Social Security taxes.

Payroll tax credit is not offered to businesses who received PPP loans or those who received FFCRA credits. It can be used by businesses who have 100 or more full-time staff who cannot work amid the pandemic, or businesses whose staff can work but does not exceed 100 employees.

With employer payroll tax deferral, you can defer payment of your portion of Social Security taxes for every employee’s wages between March and December 2020, even if you’ve received employee retention credit.

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