By Andrew Gradman, Tax Attorney
Trusted Advisor at AB FinWright LLP ( and Founder at Gradman Tax (

Accepted for publication in the CEB Business Law Reporter; reprinted with permission. Updated through April 24, 2020. The published version will reflect new developments and may contain proofreading and other changes. 

This article is the fourth of a four-part series which describes three tax subsidies which are meant to help keep employees employed during the coronavirus pandemic:

  1. Long-term deferral of the employer’s obligation to pay certain payroll taxes;
  2. A limited daily stipend for a limited number of days, to cover part of the newly-mandated paid sick or family leave (with a similar subsidy for the self-employed); and
  3. Up to $5,000 in dollar-for-dollar matching pay, for economically impacted employers.

These provisions appear in the Families First Coronavirus Response (“Families First”) Act (Pub Law 116-127, 134 Stat 178) and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (Pub Law 116-136 134 Stat 281).

4. Conclusion: Mixed Messages 

These incentives contain a few mixed messages.

A. Deferral of Employment Taxes vs. Employment Tax Penalties 

Many employers will having trouble paying the accrued taxes by the extended due dates in December 2021 and December 2022. In the meantime, some of these employers may have spent company money on dividends or perks. How, if at all, will the IRS enforce the civil and criminal penalties for the “willful” failure to collect these taxes, under IRC 6672 and 7202?

B. PPP Loan Forgiveness undermines Limit on Deferral of Employment Taxes 

As mentioned, deferral of employment taxes is available only for deposits required before the earlier of December 31, 2020 or (for taxpayers who received a PPP loan) the date the PPP loan is forgiven. This suggests a loophole: Since the forgiveness of the PPP loan applies to the interest, why not just postpone seeking forgiveness on the PPP loan until as late as possible?

C. Employee Retention Credit undermines PPP Loan Purposes 

Before accepting a PPP loan, the employer should make a cost-benefit analysis. In particular, if the employer plans to fire and furlough a lot of people, this will reduce forgiveness under the PPP loan, but it won’t reduce eligibility for the employee retention credit. Effectively, the retention credit detracts from the incentives behind the PPP loan forgiveness rules.

D. Deferral of Employment Taxes undermines Employee Retention Credit 

One of the goals behind these employment tax provisions was to free up urgently-needed liquidity. The deferral of Social Security taxes accomplishes that, to the extent of the amount of deferred tax. If so, what additional purpose is served by the payroll tax credits?

For some employers, these credits do generate extra liquidity. That’s because they are refundable; to the extent that credits earned exceed taxes owed, the government will write a check. However, to the extent that total credits are less than total taxes, these credits aren’t increasing liquidity. For the most vulnerable businesses, this might interfere with the purpose behind the retention credit, which is to incentivize employers to keep employees on at least minimal payroll. (This concern doesn’t apply to the leave credits, since paid leave is mandatory.) In particular, this happens for employers who don’t have a reasonable prospect of generating credits in excess of taxes–i.e., employers who expect to maintain significant payrolls, will incur payroll taxes faster than they can incur credits, and will thus never see a refund check. For these employers, the effect of deferral is to prevent the retention credit from discouraging firing and furloughing.

See our previous for articles for parts (1) through (3).