On July 30, 2020, the IRS updated FAQs 3, 5, 6 through 9, 11, 14 through 17, 20, and 24 through 31 to provide further clarifications on the deferral of employment tax deposits and payments. These revised FAQs specify how to report deferrals from the first quarter of 2020, whether the IRS will issue reminder notices, and how to pay the deferred amount before the applicable due dates.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows employers to defer the deposit and payment of the employer’s portion of Social Security taxes and certain self-employment taxes due in 2020. For the deferred payments to be timely and avoid the failure to deposit penalty, 50 percent of the eligible deferred amount must be deposited by December 31, 2021, and the remainder by December 31, 2022.
When reviewing this latest guidance from the IRS, employers should note that although they represent the current thinking of the IRS regarding section 2302, these FAQs are non-binding; the IRS is under no obligation to comply with these FAQs and could therefore take a different approach at any time.
Methods of Deferral
In general, employers may reduce required deposits or payments for a calendar quarter by an amount up to the maximum amount of the employer’s share of Social Security tax for the return period. This reduction doesn’t need to be applied evenly during the return period. For example, if an employer’s share of Social Security tax equals $10,000 for the third quarter of 2020, it hasn’t yet reduced its deposits for the deferral, and it has one deposit of $10,000 remaining for that calendar quarter, the employer may defer the entire $10,000. No special elections are required to defer these deposits and payments. However, employers should report the deferred taxes on the appropriate line of the updated payroll forms (such as Line 13b on Form 941).
Employers filing annual employment tax returns also may defer their share of Social Security tax due in the payroll tax deferral period and the payments of the tax imposed on wages paid during the payroll deferral period. This deferral also applies to qualifying deposits that would otherwise be due after December 31, 2020, if the deposits relate to the tax imposed on wages paid on or before December 31, 2020.
An employer that accumulates $100,000 or more in liability for employment taxes on any day during a monthly or semiweekly deposit period must deposit those taxes on the next business day. While the deferral of employment tax deposits and payments doesn’t eliminate this requirement, employers may reduce the deposited amount by the deferred portion of the employer’s share of Social Security taxes.
Application to First Quarter Deposits
Section 2302 of the CARES Act provides for the deferral of taxes during all calendar quarters in 2020. In the first quarter, this deferral applies only to amounts required to be deposited in the final five days of the quarter (i.e., amounts required to be deposited between March 27, 2020 and March 31, 2020). Although the Form 941 and the accompanying instructions have been revised for the second, third, and fourth quarters of 2020, they were not revised for the first quarter of 2020.
Due Date Reminders
The IRS plans to issue reminder notices to employers before each applicable payroll tax due date. However, since payroll taxes are paid quarterly, employers deferring their portion of Social Security tax in multiple quarters during 2020 will receive multiple notices stating the deferred amounts that are due on the applicable dates in 2021 and 2022, even though the deferred amounts for all quarters in 2020 will have the same due dates of December 31, 2021, and December 31, 2022.
Early Payment of Deferred Amounts
Employers seeking to pay a portion of the deferred amounts prior to the December 31, 2021, or December 31, 2022, due dates may do so in several ways. If using the Electronic Federal Tax Payment System (EFTPS), which the IRS suggests, the employer should select the calendar quarter in 2020 to which the payment relates and note that the payment is due on an IRS notice. For example, if an employer that files Form 941 wants to pay $300 of its deferred employer’s share of Social Security tax, $100 of which is attributable to the second calendar quarter of 2020 and the other $200 of which is attributable to the third calendar quarter of 2020, the employer must make two payments through EFTPS. Each payment should be made for the calendar quarter to which the deferral is attributable, and the entry in EFTPS must reflect it as a payment due on an IRS notice.
Refunds & Credits Through Form 941-X
If an employer continues to make its quarterly payroll tax deposits as usual, it can’t later choose to take advantage of this deferral provision under the CARES Act to claim a refund or credit for its share of Social Security tax already deposited. If the employer reduces its liability for all or part of the employer’s share of Social Security tax based on credits claimed on the Form 941 or 941-X, including the research payroll tax credit, the Families First Coronavirus Response Act paid leave credits, and the employee retention credit, the employer may receive a refund of Social Security tax already deposited, since the employer didn’t reduce deposits in anticipation of these credits.
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