As we discussed in a previous advisory, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) permits employers and certain self-employed individuals to delay payment of the employer's share of Social Security taxes and Railroad Retirement Act wages. Under Section 2302 of the CARES Act, employers can defer payment of their share of Social Security taxes incurred between March 27, 2020 (the date the CARES Act was enacted) and December 31, 2020, with 50 percent of this amount due on December 31, 2021, and the other 50 percent on December 31, 2022.
The Internal Revenue Service (IRS) issued guidance in the form of frequently asked questions (FAQs) on how the payment deferral will work in practice. In light of the guidance, we provide below a summary of this CARES Act provision.
Employers May Immediately Stop the Deposit of the Employer's Share of Social Security Taxes Otherwise Due for 2020
The FAQs state that employers wishing to take advantage of the payment deferral feature can do so without the need to make a special election of their intent to defer payment. Accordingly, employers can immediately consider deducting their share of Social Security taxes from upcoming quarterly payroll deposits.
The IRS stated that it intends to issue a revised Form 941 (the form employers use to make their quarterly payroll deposits) for the second calendar quarter of 2020 (April through June 2020), enabling employers to defer Social Security taxes for 2020. The IRS stated that it also expects to provide further information as to how deferred deposits that were due from March 27, 2020 through March 31, 2020 (the days in the first calendar quarter for which the deferral applies) can be reflected in the deferral.
Which Employers Can Defer Payroll Taxes?
All employers, regardless of size, can take advantage of the deferral feature, with the exception of employers who have a loan under the Paycheck Protection Program forgiven pursuant to Section 1106 of the CARES Act.
What Taxes Are Deferred?
The employer's share of Social Security taxes and taxes under the Railroad Retirement Tax Act are eligible for deferral. For 2020, the employer's share of the Social Security Tax is 6.2 percent of the first $137,700 of an employee's wages.
What Pay Periods Are Subject to the Deferral (Payroll Tax Deferral Period)?
The payroll Tax Deferral Period begins on March 27, 2020 and ends on December 31, 2020.
How Is the Deferral Accomplished?
No special election is required. The IRS will revise Form 941 for the second calendar quarter (April-June 2020). The IRS will issue instructions shortly for deposits made on or after March 27, 2020, for the first quarter (January-March 2020).
How Long Is the Deferral?
The deferred deposits of the employer's share of Social Security taxes and Railroad Retirement Act wages must be deposited as follows:
- (i) 50 percent on December 31, 2021
- (ii) 50 percent on December 31, 2022
How Is the Deferral Calculated if the Employer Is Also Entitled to Tax Credits Under the FFCRA or the CARES Act?
As we have written in previous advisories, employers with fewer than 500 employees are entitled to tax credits for qualified paid sick and family leave under the Families First Coronavirus Response Act (FFCRA). In addition, employers of any size are entitled to employee retention tax credits under Section 2301 of the CARES Act for 50 percent of qualified wages paid to employees while operations are significantly impacted by COVID-19 (see our previous advisory for more details).
The latest FAQs provide that an employer is entitled to first reduce its payroll deposits with respect to deferring its Social Security taxes. Then, with respect to remaining payroll amounts that are required to be deposited, the employer can further reduce its deposits in anticipation of any tax credits it is entitled to receive under the FFCRA or CARES Act. Note that under both of these laws, if an employer is entitled to tax credits exceeding its Social Security tax obligation for 2020, any excess is treated as an overpayment and is potentially refundable to the employer.
How Is the Deferral Affected by Employers Who Received a Payroll Protection Loan Under the CARES Act?
Employers who receive a Payroll Protection Loan can take advantage of the deferral rules until the employer receives a notice from its lender that the loan has been forgiven. Once notice has been received of the loan forgiveness, payroll taxes due after that date can no longer be deferred. Payroll taxes deferred prior to the notice date remain subject to the deferred deposit rules.
Are Self-Employed Individuals Entitled to a Deferral of the Social Security Tax?
Yes, self-employed individuals can defer 50 percent of the Social Security tax on net earnings from self-employment, i.e., 6.2 percent of self-employment income up to $137,770. Also, the amount deferred is not taken into consideration when calculating the estimated tax installments. The deferred amount is payable – 50 percent on December 31, 2021 and 50 percent on December 31, 2022.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.