What is a payroll deferral program: What flexibility has the government has sanctioned for the Payroll deferral program and PPP?

On August 8, 2020, Payroll deferring tax obligations, executive orders were signed by President Trump because of increasing devastations of COVID-19.

The payroll deferral program was signed to provide quick and effective tax relief to COVID-19 affected individuals and was introduced by Coronavirus Aid, Relief, and Economic Security (CARES) Act. With this payroll deferral program, collection of taxes were temporarily ceased from the employees’ paychecks which were used to fund Social Security.

Concerning the ongoing disasters of COVID-19, President Joe Biden signed American Rescue Plan Act on March 11. 2021. Through this act, $1.9 trillion bills were sanctioned to offer extensive federal assistance for the Coronavirus-affected individuals and to small businesses who have been struggling to run their businesses due to lack of opportunities and possibilities which collectively influenced the whole world. This is an updated version of the bill which was passed by Congress last year and was introduced by the CARES Act.

To understand what the payroll deferral Program is and what reliefs the Government has provided with the payroll deferral Program and PPP (Paycheck Protection Program) flexibility act read further.

  • What’s in this guide?
  • What is the payroll tax deferral Program?
  • Background of Payroll Tax Deferral
  • How Payroll deferral program and PPP differ
  • Payroll deferral program implications on employers

What is the payroll tax deferral Program?

A Payroll Tax deferral program is a presidential memorandum that compensated the employees by instructing employers to temporarily cease the 6.2% Social Security Tax deduction from the paychecks of staff who earn less than $4000 in a bi-weekly period from September 1st, 2020 to December 31st, 2020.

With this amendment in the paychecks, workers had significantly large take-home amounts which relieved affected people. For instance, if a worker earned $3000 last year and the pay was subjected to Social Security Tax, then he got $186 more.

It is also important to bear in mind that these remunerations were not exempted but delayed for time being. According to the IRS guidance, employers were obligated to withhold those taxes in the first four months, from January to April 2021. That simply means that the workers who had received increased payments till December 31st due to the exemption of taxes of Social Security and would receive paychecks with doubled deduction of the Social Security tax until the total amount is recovered.

Background of payroll tax deferral

The payroll tax deferral program was applied to the employees who earn less than or equal to $104,000 as an annual income including the pay that involves Social Security Benefit deductions. Generally, the Social Security obligation of 12.4% is divided between the employers and employees.

According to the Payroll tax deferral program, employers are allowed to choose not to hold the tax deduction from the employee portion by the end of December 2020. However, if the employer chose to defer, then the deferred amount had to recover till April 2021. Plus, self-employed workers would defer 50% from their Social Security Tax obligations from March 27 to Dec 31st, 2020.

Further clarifications of IRS guidelines 2020-65 determined that total wages for withholding of tax would be defined by pay period basis. This significantly means that a certain employee can be disqualified based on the overtime pay and other bonus pay. In addition to that, if an employer pays its workers other than the bi-weekly wage basis, then the threshold of $4000 tax deduction should be recalculated according to the pay periods. The guidelines also mentioned that penalties, interest, and additional taxes would be accrued from May 1st, 2021 if any payable taxes were deferred.

Find out the steps for collecting, remitting deferred payroll taxes, filing, and complying with the state and federal laws through a comprehensive guide.

How Payroll deferral program and PPP differ

As compared to the CARES Act, PPP (Paycheck Protection Program) flexibility Act, which was initially enacted on 5th June 2020 brings forgiveness rules for PPP loans made to businesses affected by the novel virus. With this flexibility act, which was added in the Coronavirus Aid, Relief, and Economic Security Act (CARES) a great possibility of loan forgiveness was awakened. PPP loans forgiveness eliminates an obligation through which borrowers of PPP loans were made ineligible to delay the tax deposits.

Through the PPP loan forgiveness act, the following changes have been made to the Paycheck Protection Program:

  1.  Prolong the PPP loan covered period from 8 weeks to 24 from the loan date when it was initiated. Borrowers who received PPP loans before December 30th, 2020 can use an eight-week payroll covered period or use their original.
  2. Reset the safe harbor date from June 30th, 2020 to December 31st, 2020.
  3. Grant permission up to 40% of the loan used for mortgage interest, utilities, rent, and 60% of the funds to be used for Payroll charges.
  4. Provide a 5-yrs period to all borrowers of PPP loans that are disbursed after June 5th, 2020. Before 5th June, all loans would remain on the same two-yr. terms, but if the borrower and lender negotiate then the loans before June 5 can be elongated to 5 years.
  5. Changes have been suggested to prolong the loan repayment schedules and interest accruals. Therefore, the unforgiving remaining amount should be paid either on (i) the date where the determination of forgiveness of loans was made (ii) After 10 months when the loan forgiveness was determined if more forgiveness was not requested.

Payroll deferral program implications on employers

According to the hints that Presidential Memorandum language provides depicts that the potential taxes can be waived in the future. However, the surety wasn’t at its best that Congress will bring out any legislation that forgives all the deferred taxes paid by the employers and employees. Hence, employers must consider this fact before incurring the Payroll deferral program.

Some factors also must be taken under consideration before implementing the tax program such as payroll processing matters, necessary legal steps, and possible implications on employees that may affect them in the future for unpaid liabilities. Plus, they must also consider other options for employees who will have lesser payments after the deferred period or who have terminated the service in this period.

It may also become crucial for employers to manage payroll tax management and to simplify the program requirements that can be easily implemented. Outsourcing the tax deferral payrolls will help employers to comply with the tax regulations by federal and state and in avoiding significant penalties.

Concluding remarks

Conclusively, all employers including the government entities should defer the payment of the employer’s share of the social security tax. Moreover, this bill also enables the employers to defer the payment of 2020 having 50% of the amount payable. All such rules are governed by the CARES Act.

We hope that the above piece of information has enlightened you with the payroll deferral program. In case of further ambiguities, feel free to leave a comment and we will surely respond asap.

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