Locke Lord QuickStudy: CARES Act Guide: Overview of IRS Guidance Regarding Deferral of Employment Tax Deposits and Payments

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. One form of economic assistance under the CARES Act provides short-term payroll tax relief by allowing employers to defer the deposit and payment of certain employment taxes. In an FAQ released on April 10, 2020, the IRS provides guidance on how the deferred employment tax deposits provision interplays with the loan forgiveness provisions in the CARES Act and other COVID-19 related legislation. Significantly, in this guidance, the IRS states that an employer who has received a Paycheck Protection Program (“PPP”) loan can defer the deposit and payment of certain employment taxes without penalty through the date the lender issues a decision to forgive the loan.¹

Background

Section 2302 of the CARES Act provides that employers may defer the deposit and payment of the employers’ portion of Social Security taxes and certain railroad retirement taxes (the “Applicable Employment Taxes”). For additional information on Section 2302 of the CARES Act please see Locke Lord Quick Study: UPDATE: CARES Act Guide: Overview of Key Business Tax Provisions. 

Section 1102 of the CARES Act established the Small Business Administration-administered PPP. The PPP authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis (a “PPP Loan”). For additional information on the PPP, please see Locke Lord QuickStudy: Saving Our Small Businesses: Congress Reaches Agreement on New Forgivable Paycheck Protection Loans to Small Businesses. 

When can employers begin deferring deposit and payment of the Applicable Employment Taxes without penalty?

The deferral opportunity applies to deposits and payments of the Applicable Employment Taxes that would otherwise be required to be made during the period beginning on March 27, 2020, and ending on December 31, 2020 ‎(subject to an earlier date if a PPP Loan lender issues a decision to forgive all or part of the PPP ‎Loan prior to such date)‎. No special election is required for an employer to defer deposits and payments of the Applicable Employment Taxes.

The FAQ clarifies that Form 941, Employer’s QUARTERLY Federal Tax Return, will be revised for the second calendar quarter to reflect this deferral opportunity, and information will soon be provided to instruct employers how to reflect the deferred deposits and payments.

Which employers may defer deposit and payment of the Applicable Employment Taxes?

All employers may defer the deposit and payment of the Applicable Employment Taxes. However, as discussed further below, employers that received a PPP Loan may not defer the deposit and payment of the employer’s share of Social Security due after the date the PPP Loan is forgiven.

Can an employer that has received a PPP Loan that is not yet forgiven defer deposit and payment of the Applicable Employment Taxes without incurring penalties?

Yes. Employers who have received a PPP Loan, but whose loan has not yet been forgiven, may defer deposit and payment of the Applicable Employment Taxes that otherwise would be required to be deposited between March 27, 2020 and the earlier of (i) the date the lender issues a decision to forgive the loan, or (ii) December 31, ‎‎2020,‎ without incurring failure to deposit and failure to pay penalties. If an employer’s PPP Loan is forgiven, however, it can no longer defer deposit and payment of the Applicable Employment Taxes that otherwise become due after the lender’s decision date.  Deposit of Applicable Employment Taxes that were deferred through the date that the PPP Loan was forgiven may continue to be deferred and remitted as required by the CARES Act (50% must be deposited by December 31, 2021 and the remaining ‎‎50% must be deposited by December 31, 2022).

Is the ability to defer deposits of the Applicable Employment Taxes in addition to the relief provided in Notice 2020-22?

Yes. Notice 2020-22 provides relief from the failure to deposit penalty for not making deposits of employment taxes in anticipation of the Families First Coronavirus Response Act (“FFCRA”) paid leave credits and the CARES Act employee retention credit. The ability to defer deposit and payment of the Applicable Employment Taxes applies to all employers, not just employers entitled to paid leave credits under the FFCRA and employee retention credits under the CARES Act.

For additional information on Notice 2020-22, the FFCRA, and the CARES Act, please see Locke Lord QuickStudy: IRS Guidance Regarding Waiver of Penalties and Acquiring Advance Payments for Payroll Tax Credits; Locke Lord QuickStudy: UPDATE On The Families First Coronavirus Response Act (FFCRA) Leave Protections Following Updated DOL Guidance; Locke Lord Quick Study: UPDATE: CARES Act Guide: Overview of Key Business Tax Provisions.

Can an employer that is eligible to claim refundable paid leave tax credits or the employee retention credit defer its deposit and payment of the Applicable Employment Taxes prior to determining the benefits of these credits?

Yes. An employer is entitled to defer deposit and payment of the Applicable Employment Taxes prior to determining whether the employer is entitled to the paid leave credit or the employee retention credit, and prior to determining the amount of the employment tax deposits that it may retain in anticipation of these credits, the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits.

When must the Applicable Employment Taxes be paid?

The deferred deposits of the Applicable Employment Taxes must be paid and deposited by the following dates to be treated as timely and to avoid a failure to deposit penalty:

1. On December 31, 2021, 50% of the deferred amount; and
2. On December 31, 2022, the remaining amount.

Are self-employed individuals eligible to defer payment of self-employment taxes on net earnings from self-employment income?

Yes. Self-employed individuals may defer the payment of 50% of the Social Security tax on net earnings from self-employment income (the “Deferred Self-Employment Taxes”) for the period beginning on March 27, 2020, and ending December 31, 2020.

Is there a penalty for failure to make estimated tax payments for the Deferred Self-Employment Taxes during the payroll tax deferral period?

No. For any taxable year that includes any part of the payroll tax deferral period, the amount of the Deferred Self-Employment Taxes for self-employment income during the period beginning on March 27, 2020, and ending December 31, 2020 is not used to calculate estimated tax payments.

When must the Deferred Self-Employment Taxes be paid?

Payments of the Deferred Self-Employment Taxes are due on the following dates:

1. On December 31, 2021, 50% of the deferred amount; and
2. On December 31, 2022, the remaining amount.

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