Modifications of Payroll Taxes
- Employers or self-employed individuals may defer payment of the employer’s share of the Social Security tax they are otherwise responsible for paying to the federal government with respect to their employees. Half of the taxes incurred through the end of 2020 must be repaid by December 31, 2021 and the other half by December 31, 2022.
- On August 8, 2020, the president issued a memorandum to allow employers to defer withholding employees’ share of payroll taxes from September 1 through December 31, 2020, and required employers to increase withholding and pay the deferred amounts from wages and compensation paid between January 1, 2021 and April 31, 2021. The Economic Aid Act extended the repayment period through December 31, 2021. Penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.
- The Economic Aid Act extended the refundable payroll tax credits for paid sick and family leave that were established in the Families First Coronavirus Response Act, through March 31, 2021. The American Rescue Plan Act of 2021, enacted March 11, 2021, extended the tax credits for paid sick and family leave for wages paid with respect to the period beginning April 1, 2021, and ending on September 30, 2021. For more information, please refer to this IRS factsheet.
- The Economic Aid Act also allowed self-employed individuals to use their average daily self-employment income from 2019, rather than 2020, for purposes of computing these credits.
Modifications for Net Operating Losses
- The policy that previously did not allow that NOL to be carried back to reduce income in a prior tax year has been relaxed. Taxpayers may now carry back five years an NOL arising in a tax year beginning in 2018, 2019 or 2020.
- Taxpayers may now also use an NOL to fully offset income in 2020, as the law temporarily removes the taxable income limitation.
Modification of Limitation on Business Interest
- Taxpayers may now temporarily increase the amount of interest deductibility in 2019 and 2020 from the prior 30% limitation to 50% of adjusted taxable income.
- This provision intends to increase liquidity with a reduced cost of capital, enabling businesses to continue operations and keep employees on payroll.