Among other provisions, the CARES Act permits employers to defer the deposit and payment of the employer’s portion of social security taxes that otherwise would be due between March 27, 2020, and Dec. 31, 2020. Employers may instead deposit half of these deferred payments by the end of 2021 and the other half by the end of 2022.
Recently, the IRS issued guidance regarding the payroll tax deferrals, offering businesses much-needed clarification about the program. Here is what we now know:
- Recipients of Paycheck Protection Program (PPP) loans may defer paying these taxes. Originally, this was unclear, but the new guidance clarifies that PPP loan recipients are eligible to defer deposit and payment of the employer's share of social security tax. Once the employer receives a decision from its lender that the loan is forgiven, however, the employer is no longer eligible to defer such taxes after that date. Nevertheless, for payments deferred through the forgiveness date, an employer may continue deferral until the end of 2021 and 2022 without incurring penalties for failure to deposit and failure to pay. This may give many employers who are expecting PPP forgiveness an opportunity to defer a portion of the payroll taxes for many months. Considering that some employers may have to wait until after June 30, 2020, for submission of the loan forgiveness request and then the lender has another 60 days after that to respond, it may be a 4- or 5-month (or longer) payroll tax deferral for some PPP recipients.
- All employers are eligible for the deferral program, but, as detailed above, employers that receive a PPP loan become ineligible to continue deferring tax payments after receiving notice that the loan is forgiven. The CARES Act also explains that taxpayers who have had a loan forgiven under the U.S. Treasury Program Management Authority established in Section 1109 of the CARES Act also are ineligible to participate.
- Employers need not make a special election to defer deposits and payments. The IRS will revise Form 941 (Employer's Quarterly Federal Tax Return) for the second calendar quarter of 2020 (April through June 2020). Additional information will be forthcoming about how employers should reflect deferred deposits and payments otherwise due on or after March 27, 2020, for the first quarter of 2020 (January through March 2020). Employers will not be required to make a special election to be able to defer deposits and payments of these employment taxes.
- Self-employed individuals are eligible to defer paying self-employment tax. Just like employers who pay social security taxes, self-employed individuals may defer payment of 50% of the social security tax on net earnings from self-employment income.
This deferment applies to the payments of the employer share of FICA taxes (6.2%) and certain railroad retirement taxes. The employer must still deposit the employer’s share of the hospital insurance tax (1.45% portion) as well as all of the employee’s share of the payroll taxes withheld.
Please consult with us for further clarification.