Practice owners with staff, or self-employed individuals without staff, can take advantage of an interest-free loan in the form of a deferral of 2020 matching Social Security taxes into 2021 and 2022.
Practice owners are required to withhold Social Security taxes from their staff salaries at a rate of 6.2% on the first $137,700 (in 2020) paid to each employee, including any practice owner paid as a W2 employee. The practice then matches those taxes, so the government gets 12.4% in Social Security taxes on up to $137,700 (in 2020) of gross wages per employee.
Under the revised PPP rules, even practices who got the PPP can defer remitting those matching Social Security taxes on wages paid after March 27, 2020 through the remainder of 2020. The deferral equals $620 for each $10k of salaries paid. Practice owners would repay 50 percent of the amount deferred by 12/31/21 and the remaining 50 percent by 12/31/22. No interest will be due on these deferred taxes.
The rules appear straight forward enough. But how would a practice owner notify the IRS that they are deferring the employer Social Security match? Each quarter any practice that pays W2 wages files a Form 941 with the IRS. This form is a quarterly reconciliation of the federal payroll taxes owed with the payroll tax deposits actually made. The Form 941 will be revised for Q2 to reflect the deferral of this employer payroll tax. (More info on this 941 tax form is available at: https://www.irs.gov/forms-pubs/about-form-941.)
Special Rule for Self-Employed Individuals and Partners in LLCs:
All practice owners can defer the Social Security match on their staff salaries, including the W2 wages paid to the practice owners. How can practice owners benefit from this opportunity on their own matching Social Security taxes if their practices are operated as sole proprietorships or partnerships and they are not allowed to pay themselves as W2 employees?
According to the IRS: Self-employed individuals may defer the payment of 50 percent of the Social Security tax on net earnings from self-employment income … for the period beginning on March 27, 2020 and ending December 31, 2020.
This “Self-employment tax” is paid as part of filing your personal tax return, so make sure to remind your tax preparer next winter if you want to take advantage of this tax deferral when we prepare your 2020 personal tax returns.
More info about this opportunity to improve your practice cash flow for the remainder of 2020 is available at: https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020.
If you are a client of our firm’s payroll service, please notify us at firstname.lastname@example.org if you plan to take advantage of this interest-free advance. Otherwise, make sure to reach out to your payroll service as soon as possible to get the ball rolling, and if they give you a hard time, switch to us.