In Part 1 of our 3-part COVID-19 response video series, hear from Jason Peckham, Tax Guard’s VP of Resolutions, how the deferral of federal payroll taxes impacts small businesses and commercial lenders.
Please contact us if you have any questions about how these changes at the IRS can affect your commercial lending organization.
COVID-19 Response Video Series – Part 1
Hello, my name is Jason Peckham and I am vice president of Resolutions with Tax Guard. Thank you for joining us today. Hope this finds you both healthy and safe. This is part one of three of our video series relative to recent changes to federal payroll taxes. And those changes are based on both IRS initiatives as well as recent legislation. Today, we’re talking specifically about deferred payroll taxes. A little background on Tax Guard before we jump in. We started the company back in 2009, and there’s two aspects of our service.
On the one hand, we monitor tax compliance for businesses that borrow money from banks, asset based lenders and other lenders. The idea being that the earlier we can identify an issue, the easier it is to resolve. The better the outcome, the more likely we are to preserve funding. On the back end, the second part of what we do is that when issues do arise, we can jump in and resolve them, usually through an installment agreement. And then a document called the Subordination of Federal Tax Lien, we currently work with about 400 different banks, asset based lenders and factors from across the country.
The idea of Tax Guard’s monitoring service, again, is to identify issues before they become a problem. And prior to Tax Guard lenders had to rely upon public record searches and the Internal Revenue Service to file a federal tax lien. That’s assuming, of course, the IRS did file that lean. And if they do, it takes about 15 months on average before the Internal Revenue Service gets around to fund the federal tax lien. With Tax Guard, we can identify issues when they are generated.
A business has cash flow issues. A business stops paying taxes. That’s where the liability is created. The risk is generated at that particular point in time. And Tax Guard can identify those issues essentially on the spot. Unfortunately, I think we’re going to see a lot more of these issues in the next year or two. Given the current economic environment, I think we are going to have a lot of businesses that end up falling behind with the Internal Revenue Service, which means the monitoring and keeping on those issues are going to be more important now more than ever.
In terms of payroll taxes, there’s a few initiatives that are affecting those payroll taxes, it’s probably easiest to just refer to some of the questions that I get from lenders. Over the past week or so, I’ve heard businesses don’t have to pay payroll taxes. Is that correct? Well, not really. It’s a limited in the sense of there are some deferrals, but again, they’re limited. And that’s based on the CARE Act. Is the Internal Revenue Service really shut down for 90 days?
Again, not really. The Internal Revenue Service is up and running, but there are a few limitations. And then what are these payroll tax credits that everybody’s talking about? And those are based on the CARES Act and the Family First Act. Today, again, we’re going to refer to and discuss the payroll tax deferrals from the CARES Act. But I encourage you to take a look at the other two videos in this series on the People’s First Initiative and the payroll tax credits.
Before we jump into the deferral, it’s important to kind of get a little background on payroll taxes in general, one of the frustrating things about the media is that it’s talking about payroll taxes or employment taxes in general, as if all of those taxes were deferred. That’s really not the case. There’s actually three components to payroll taxes. Number one, the amount withheld from the employees paychecks. Number two, Social Security taxes, and number 3, Medicare. When we’re talking about the deferred taxes based again on the CARES Act and Senator Grassley’s office did a nice job of summarizing this, employers can defer part of the employment or withholding taxes.
It’s the employer matching portion of Social Security, which is about 6.2%. So as long as half of that amount is paid by the end of 2021 and the other half is paid by 2022, the business will not incur any penalties. So instead of paying it all now on the 941 return, they can defer some of it later. This applies to 941 returns for the second, third and fourth quarter of 2020. Remember, it’s limited, it’s only the employer matching portion of Social Security that can be deferred, not all payroll or employment taxes in general, if we take a look at it, 941 return, we can get a closer look at this and remember three components to employment taxes.
Number one, withholding, which is line three. Number two, Social Security taxes, line 5a, and Medicare taxes, number three, which is line 5c. The amount that can be deferred is just the Social Security taxes, and it’s not the full amount. It’s essentially one half. So in this case, the Social Security taxes are 80000 dollars. The amount that can be deferred is 40000 dollars. Half of that can be deferred to the end of 2021.
The other half can be deferred and paid by the end of 2022. This is limited because the business still has to pay one hundred and fourteen thousand dollars on time.
The total liability for the quarter is one hundred and fifty four thousand dollars. You don’t have to pay the entire amount. They can defer 40000 dollars into the future. But that still means that they have to pay one hundred and fourteen thousand dollars on time. So there may be some benefit to deferring those payroll taxes in the future. The question is, is it really a good idea? Maybe not. It sounds like a great idea to defer some of these taxes, but what we’re really talking about doing is essentially exchanging one set of problems for another.
The business is struggling to make federal tax deposits. Now, there’s a good chance they’ll be struggling to make those same federal tax deposits at the end of 2021, the end of 2022. If all we’re doing is kicking the can down the road, there may not be a lot of benefit conferred by this particular provision. Another thing to remember is that it’s extremely complicated and confusing. You’re talking about changing a 941 return. And when you combine that with the payroll tax credits and some of these other issues that are out there, you really need an accountant to decipher all of these issues.
Businesses are going to come to lenders and say, look, we don’t have to make federal tax deposits in the year 2020. That’s not correct. A lot of businesses are going to be confused by these provisions and they’re going to fall behind as a result. Again, the benefit conferred, you know, may not outweigh all the complications and problems that are created by these provisions. Businesses in general should make every effort to make the federal tax deposits in full and on time, the businesses close, maybe it makes little sense to defer some of that into the future, but making a wholesale effort to say, look, we’re not going to make any of our employer matching portion now or use that to run the business, we’re going to kick the can down the road and pay that in the future.
We’re probably setting the business up to fail in the sense of exchanging one set of problems for another. These are extremely complicated issues. If you have questions about them in general, by all means, feel free to give us a phone call if you have a specific client that you want to talk about in terms of issues with the Internal Revenue Service or how these issues affect that specific client. Again, give us a phone call. That’s what we’re here for.
Again, a reminder, please check out the second and third videos in this series. Thank you very much for joining us today and we’ll look forward to hearing from you in the future.