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The recently enacted $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a provision which allows employers to defer the deposit and payment of the employer’s share of Social Security taxes, as well as certain railroad retirement taxes. Now, the IRS has issued additional guidance clarifying this.
Signed into law on March 27, 2020, the CARES Act contains several business relief provisions, including an employer payroll tax deferral. This deferral does not apply to (1) employee Federal income tax withholding, (2) the employee’s and employer’s portion of the Medicare tax, or (3) the employee’s portion of the Social Security tax.
Rather, these deferred taxes apply solely to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020 and ending December 31, 2020 (the “payroll tax deferral period”). The deferred taxes will be due and payable to the IRS in 50% installments, the first due by December 31, 2021, and the second by December 31, 2022.
There are no employer eligibility requirements with respect to deferral and no application or formal election is required to take advantage of this provision.
New Guidance Offers Insight Into Application of Key Provisions
The law provides that the deferral does not apply to any taxpayer if the taxpayer has had indebtedness forgiven under this additional guidance pursuant to the Paycheck Protection Program (PPP) loan. While this language suggests that a taxpayer receiving PPP loan forgiveness cannot take advantage of the payroll tax deferral on any wages it paid, this is not the position taken by the IRS.
The IRS position states that employers who are recipients of a PPP loan may not defer the deposit and payment of the employer’s share of Social Security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven. This means that the employer can defer its share of the applicable taxes up to the date that a decision on loan forgiveness is received without incurring penalties for failure to deposit and failure to pay.
Furthermore, the IRS states that the employer’s share of Social Security tax that is deferred prior to the date of loan forgiveness does not have to be paid when the employer becomes ineligible. The tax can remain deferred for the term of the deferral period noted above. The guidance also confirms the ordering of the reduction of payroll tax deposits when an employer is deferring its share of payroll and is also receiving employment tax credits under the Families First Coronavirus Response Act (FFCRA), the emergency paid sick leave, FMLA, and the CARES Act Employee Retention Credit.
The employer should first determine the amount it is able to defer under the employer payroll tax deferral and then correspondingly reduce the employment tax deposit before any reductions for the FFCRA credit or the Employee Retention Credit.
Self-employed taxpayers are entitled to a comparable reduction in their self-employment taxes pertaining to 50% of Social Security tax on net earnings from self-employment for the period March 27, 2020, to December 31, 2020 (the “payroll tax deferral period”). The self-employed taxpayer can receive this benefit through a reduction of estimated taxes during the year. The guidance does not currently describe how the self-employment income for this period is to be determined. Details are expected to be forthcoming.
The IRS is currently revising Form 941, Employer’s Quarterly Federal Tax Return, for the quarter ending June 30, 2020 to reflect these deferred deposits and continues to provide updated guidance on several issues involving the CARES Act tax provisions.
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