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The Most Feasible Ways To Calculate The Payroll Tax Deferment & ERC

Recently, the IRS (Internal Revenue Service) has pulled the 2020-65 notice for guidance about employee Payroll tax deferment. The White House stated it on 8th August 2020 (in its Executive Order). The Executive Order addressed the payroll tax deferral process in light of the ongoing COVID-19 pandemic. Also, it directed the Treasury Department to use the power under the 7508A for deferring withholding, employee portion Social Security tax payment on wages in September through December 2020. According to the Executive Order, the Treasury Department took ways, like legislation, to end the payroll tax deferment and tax payments.

The notice addresses that the employers can know whether they should apply for payroll tax deferment or not. Let’s know about some key points of the notice.

Taxes Covered

The payroll tax deferment is only there for the employee part of Social Security tax (like railroad retirement). As an outcome, income tax withholding, employer portion of Medicare tax, and Social Security should be deposited and withheld.

The notice relief is solely the payroll tax deferment in payment timing of the Social Security tax of the employee part. While the Executive Order mentions the likeliness of changing deferral into forgiveness, the notice addresses tax payment deferral without forgiveness.

Wages Applicable

The Social Security tax of the employee portion is about the wages paid on the due date in the 1st September 2020 period through 31st December 2020. These are when wages are lesser than $4,000 and calculated bi-weekly for the payment period. $4,000 corresponds to $104,000 of annual income and $36,000 from September 2020 to December. Depending on the 6.2% Social Security Tax rate, the maximum payroll tax deferment is $2,322 per employee (tax rate times 6.2% $36,000). 

The $4,000 threshold is assessed for other periods, like weekly and monthly. The $4,000 is a hard cap, so when the wage amount is equal to or more than $4,000 (for the computed payment period), then the wages won’t qualify. The limit is ideal for an applicable pay time, so it is ideal for wages to qualify for a payroll tax and deferment pay period and not for another payment time.

Mechanics Of Deferral

The payroll tax deferment is shifting tax payments otherwise payable from September through December 2020. It is from the period 1st January 2021 through 30th April 2021. Deferral mechanics result in more concerns and questions from employers. For example, when employee X has waged for 1st September 2020 till 31st December 2020 with payroll tax deferment Social Security tax as $900, the deferred $900 tax is withheld depending on X’s employee wages paid from 1st January 2021 through 30th April 2021. When employee X is paid the same amount for the payment period from 1st January 2021 through 30th April 2021 (assume it as nine pay periods), $900 one-ninth is withheld and paid in a payment period from 1st January 2021 through 30th April 2021.

The withholding is additionally to withholding the wages from 1st January 2021 through 30th April 2021.

Payroll tax deferment mechanics are ideal for an employee from 1st September 2020 till 30th April 2021. The employer can withhold deferred taxes from 1st January 2021 to through wages on 30th April 2021. The intended mechanics don’t work great in other scenarios, like being fired or quitting before 30th April 2021. Employers should develop other tax collection mechanisms with payroll tax deferment. They should also have alternative mechanisms with state, local, and federal employment tax laws and contracts.

Employer Discretion

Neither the Executive Order nor the notice addresses whether the employers shall implement payroll tax deferment. Many employers had questions about the obligation to defer employment tax without clarity. However, the IRS indirectly addresses the discretion issue by info about the notice 2020-65 Hotline, which you can refer to.

It’s unnecessary to have payroll tax deferment for employers, which is at the notice ends. It is optional to have employer deferral as it leaves the employers to select whether they need to participate.”

About ERC

The government made the Employee Retention Credit (ERC) with payroll tax deferment to help ease the COVID-19 financial burden on small firms. Eligible ERC employers get tax credits after paying health plan expenses and qualified wages on behalf of the employees.

The ERC (Employee Retention Credit) means a fully refundable tax credit to encourage business owners to keep employees on the payroll, which minimizes the number of workers who file for unemployment benefits. You can compute credit differently for 2020 and 2021:

The tax credit for 2020 is around half of the qualified wages that eligible employers pay employees in the calendar quarter. The qualified employers get a maximum of $5,000 per employee credit.

For 2021, tax credit equals 70% of qualified wages that eligible employers pay employees, and qualified employers get the max of $7,000 credit per quarter (or $28,000 per employee for that particular year). Unlike other business benefit programs like payroll tax deferment, firms can get the ERC. As ERC is not a loan, recipients won’t have to repay or seek ERC fund forgiveness.

Things can get tough while finding the ERC and payroll tax deferment. So, the best bet would be to calculate the potential amount through the Tax Credit Estimator.

How To Calculate The ERTC

If we look at 2020, qualified expenses and wages are capped at $10,000 per employee, and the credit is up to 50% of the amount. So you can claim around $5,000 worth of credits for the employee (again, for the whole year). To figure out how much to claim, you should use the calculator!

Tips For Calculation The Credit From The ERC Calculator

Below are some effective tips for calculating the ERTC from the ERC calculator:

  • Move to Calculator
  • Click on File> Copy it at the right-hand screen. You’ll have your calculator version.
  • Click on the bottom tab labeled 2020.
  • First, you want to know the business eligibility for ERC for the quarter. With this calculator, you get help, and the post walks through precisely to do it.
  • You can only change values in gray cells; don’t change any white cell values, as such cells contain formulas, and altering formulas also cause the calculation to have errors. The content that appears in light gray cells is example content. You are free to alter it to relevant business values.

After determining eligibility, scroll to the ERC Credit Calculation section and enter health plan expenses and qualified wages. Let’s know some important things.

2020 Q2 qualified wages and expenses would include the ones paid out on 13th March 2020 and 30th June 2020 Q3 qualified wages and expenses include the ones paid between 1st July 2020 and 30th September 2020 Q4 qualified expenses and wages include the ones paid on 1st October 2020 and 31st December 2020

These are wage restrictions qualifying for ERC:

  • Companies can’t include PPP paid wages or EIDL as qualified wages
  • Firms can’t include paid wages to employees related to business owners as qualified wages
  • You can’t include WOTC claimed wages or other tax credits as ERC qualified wages
  • Add inputs in gray cells, and you’ll get the taxes with the ERTC tax credit calculator

What Do We Mean By Employee Payroll Tax Deferral?

The Presidential Memorandum was issued on 8th August for eligible employers to suspend withholding of 6.2% on Social Security Tax from workers earning lower than $4,000 per bi-weekly period, from 1st September through 31st December 2020.

It increases workers’ take-home pay through payroll tax and deferment tax amounts – for example, someone working with $2,000 earnings can get a Social Security tax of $124. Remember that payroll tax is not forgiven as it is postponed and needs repayment.

In the IRS’s payroll tax deferment guidance, employers needed to withhold postponed tax over the first four months of 2021. Workers with more take-home pay get low paychecks for the same months as their withholding for Social Security doubled up.

With payroll tax deferment, you can consider increasing take-home payments from September through 2020 December as short-term loans that you should repay over the first four months.

Difference Between Employee Retention Credit And Employer Payroll Tax Deferral  

Generally, only a few restrictions are in payroll tax deferment of the company’s social security taxes than getting total refundable credit on these taxes. The below table illustrates some differences in both:

  Tax Credit Tax Deferral
Employers Full or part closing by law low gross receipts All
Employees 100 and more full-time, not working>full time 100 working or not All
Self-employed None All
Timeline 13th March 2020, to 31st December 2021 27th March 2020 to 31st December 2021
Affected Taxes The qualified employer portion of SS taxes Employer portion SS taxes
Taxes due None with a potential refund 50% for 31st December 2021

50% for 31st December 2022

Action Refundable credit Deferral
PPP Loan Impact No credit with loan None
FFCRA Impact Credit not approved for FFCRA credits None

Conclusion

Employers that already paid their employer’s Social Security tax on wages in the payroll tax deferment period don’t defer tax payment after filing Form 941-X. For claiming a Tax credit or refund, including the first calendar quarter. However, the employer can file Form 941-X for applying for credit (like the paid leave credits and ERC) on some or all the Social Security tax and claim a credit or tax refund. Business Tax Benefits is one of the leading consultancy firms to file ERTC tax Credit on payroll tax deferment payments. Our expert CPAs, accountants, and tax attorneys are adept at tax planning and can create the most comprehensive tax-saving plans.

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