The payroll tax deferral provision for employers was authorized by the CARES Act passed in March.
Under the CARES Act, an employer can defer payment of the employer’s 6.2% Social Security tax portion of federal payroll taxes for the period spanning March 27, 2020, through December 31, 2020. Half of the deferred amount is due at the end of 2021 and the other half must be paid by the end of 2022.
Note that there is no dollar cap on the amount of payroll tax that can be deferred. However, the tax is limited to a wage ceiling of $137,700 for 2020.
It’s important to note the deferral isn’t mandatory. It’s up to employers to decide what to do.
How do you arrange deferral? There’s no formal procedure or notification required by the IRS. All you have to do is simply reduce or eliminate your regular payroll deposits.
The deferred amounts must be reported, however, on the employer’s Form 941, Employer’s Quarterly Federal Tax Return, for the calendar quarter in which the Social Security tax would normally be due.
Virtually all business entities are eligible for this payroll tax deferral provision. Note that the original CARES Act provision required employers that received a Paycheck Protection Program (PPP) loan to give up the deferral privilege after receiving notification of PPP loan forgiveness. But that rule was negated by later legislation that allows employers to continue the deferral privilege even after a PPP loan amount is forgiven.