New IRS FAQs: 2020 employment tax deposits/payments deferral
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides employers with a deferral mechanism for the employer portion of any Social Security taxes and self-employed individuals with a deferral mechanism for the employer portion of any self-employment taxes attributable to Social Security.
The Act stipulates that 50% of any taxes eligible for deferral are due on December 31, 2021, and the remaining 50% of such taxes are due on December 31, 2022.
The employer portion of Social Security payroll deferral has several advantages:
- It helps cash-strapped companies with cash flow – and no interest or penalties will be charged, per IRS Notice 2020-22.
- It applies to all businesses; a business does not need to be adversely affected by COVID-19.
- No application is needed; the deferral is reflected on the quarterly filing of IRS Form 941, Employers Quarterly Federal Tax Return.
- The business can use the money for other purposes.
Note that this deferral option isn’t available if the taxpayer had debt forgiven under the CARES Act for certain SBA loans, such as the Paycheck Protection Program.
The Act did offer immediate guidance but there were several outstanding questions.
On July 30, 2020, the IRS updated FAQs 3, 5, 6 through 9, 11, 14 through 17, 20, and 24 through 31 with further clarifications on the deferral of employment tax deposits and payments. The new IRS guidance specifies how to report deferrals from the first quarter of 2020, whether the IRS will be issuing reminder notices, and how to pay the deferred amount before the applicable due dates.
Overall, 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 $8,000 for the third quarter of 2020, it hasn’t yet reduced its deposits for the deferral, and it has one deposit of $8,000 remaining for that calendar quarter, the employer may defer the entire $8,000. 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 that file 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.
Note that employers that accumulate $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.
First Calendar Quarter of 2020 Deferrals
Form 941 was not revised for the first calendar quarter of 2020, so an employer deferring its share of Social Security tax due on or after March 27, 2020, or related to wages paid between March 27, 2020, and March 31, 2020, will have a discrepancy on the first-quarter Form 941.
As a result, the IRS will send a notice identifying the difference between the liability reported on Form 941 for the first calendar quarter and the deposits and payments made for the first calendar quarter as an unresolved amount. The IRS notice will include additional instructions on how the employer should inform the IRS that the reason for the discrepancy is due to a deferred deposit or payment under Section 2302 of the CARES Act.
The IRS intends 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 the year 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 who wish 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.
Employers using the Electronic Federal Tax Payment System (EFTPS) - recommended by the IRS - 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 filing 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 applies, 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 quarterly payroll tax deposits as normal, so that each quarter’s liability is paid in full, 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. However, to the extent 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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