IRS Updates Guidance on CARES Act Payroll Tax Deferrals

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. The law permits employers instead to deposit half of these deferred payments by the end of 2021 and the other half by the end of 2022.

On April 10, 2020, the IRS issued guidance regarding the payroll tax deferrals, offering businesses much-needed clarification about the program. The issues addressed include the following:

• Paycheck Protection Program loan recipients may defer paying these taxes. The CARES Act suggested that employers who benefit from the Paycheck Protection Program could not defer payment of social security taxes. The new guidance clarifies that Paycheck Protection Program 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.
  
  June 5, 2020 Update: On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 removed the previously established prohibition on federal payroll tax deferral for employers that had a Paycheck Protection Program loan forgiven. Accordingly, all taxpayers are eligible 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. For additional information on the Paycheck Protection Program Flexibility Act of 2020, click here.
  
  
• All employers are eligible. The guidance explains that all employers are eligible for the deferral program. However, as explained above, employers that receive a Paycheck Protection Program 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). In no case will employers 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. The guidance explains that self-employed individuals, like employers who pay social security taxes, may defer payment of 50 percent of the social security tax on net earnings from self-employment income.

For additional questions about the social security tax deferral program, or the April 10 IRS guidance, please contact one of the authors of this article, any of the McGuireWoods COVID-19 Response Team members or your McGuireWoods labor and employment or tax contact.

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