IRS Publishes Frequently Asked Questions on Payroll Tax Deferral (US)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides employers a number of economic relief programs, including deferral of employers’ share of quarterly social security tax deposits and forgivable Payroll Protection Program (PPP) loans.
The IRS recently released a set of frequently asked questions and answers regarding the CARES Act’s deferral of quarterly Social Security tax deposits. The Q&As confirm that no election is necessary for employers to begin deferring deposits, and further state Form 941 will be revised for the second calendar quarter of 2020 (i.e., April – June, 2020) with instructions for how to reflect deferred taxes that were otherwise due for the first quarter of 2020 (i.e., January – March, 2020).
In addition to confirming that no election is necessary and that a revised Form 941 is forthcoming, the Q&As clarify the interaction between PPP loan forgiveness and deferral of payroll deposits. The CARES Act provides that employers who have had a PPP loan forgiven may not defer federal payroll tax deposits, but Q&A 4 states that employers who have applied for and received a PPP loan may continue deferring deposits up until the lender actually forgives the loan. In addition, amounts deferred prior to forgiveness of a PPP loan will continue to be deferred until the “applicable dates” (December 31, 2021 for the first 50% of the deferred tax amount, and December 31, 2022 for the second 50% of the deferred tax amount).
The forgivable amount of a PPP loan is based on how the loan proceeds are used during the first eight weeks following receipt of the loan. Assuming that employers do not begin applying for forgiveness until after the initial eight-week period, employers should have at least eight additional weeks of payroll tax deferral following receipt of a PPP loan. In addition, employers might be able to benefit by delaying applications for PPP loan forgiveness, as delaying forgiveness on a PPP loan could allow additional deferral; on the other hand, the benefit of knowing that the loan has been forgiven may outweigh the marginal benefit of additional tax deferral.
Finally, the Q&As clarify and confirm that self-employed individuals may defer 50% (and only 50%) of their Social Security tax on net earnings. Self-employed individuals should be aware that the other 50% of their Social Security tax is not deferred and could be subject to penalties and interest.