On April 13, 2020, the IRS issued 2020ARD 073-2 regarding frequently asked questions on payroll tax deposits and specifically the interplay between the Paycheck Protection Program (PPP) Loan and various payroll tax deferral rules passed as part of the CARES Act. The deferral rules relate to the employer portion of social security taxes (herein referred to as “Payroll Taxes”) and certain railroad retirement taxes. This writeup will focus on Payroll Taxes. Below are the highlights:
- Payroll Taxes that are eligible for deferral – Employers may defer Payroll Tax payments and deposits beginning March 27, 2020 (enactment date of CARES Act) through December 31, 2020. Deferred taxes are due 50% on December 31, 2021 and 50% on December 31, 2022. The IRS will not impose failure to deposit or failure to pay penalties. The Notice does not indicate whether interest would accrue, however, we do not believe it would be consistent with the intent of the law to charge interest.
Note that an employer does not need to make a special election to begin deferring Payroll Taxes. Contact your payroll company to inform them of your decision to defer payroll taxes, include dates of desired deferral (March 27, 2020 through December 31, 2020).
- Payroll tax deferral and PPP loans – borrowers of PPP loans may defer Payroll Taxes that would otherwise be due beginning March 27, 2020 through the date the borrower receives a decision from the lender to forgive the PPP loan. The IRS will not impose failure to deposit or failure to pay penalties on taxes deferred during this time. Once a decision to forgive a PPP loan is received, the borrower can no longer defer its Payroll Taxes.
Payroll Taxes that were deferred between March 27, 2020 and the date of loan forgiveness are due 50% on December 31, 2021 and the remaining 50% is due on December 21. 2022.
- Form 941 – The IRS will provide further instruction regarding deferral of Payroll Taxes between March 27, 2020 and March 31, 2020 and proper reporting. The Q2 Form 941 (April-June) is being updated by the IRS to reflect the deferral reporting and should be available soon.
- Self Employed Individuals – Self Employed Individuals may defer payment of 50% of the social security tax on net earnings from self-employment income from March 27, 2020 through December 31, 2020. Payment of such deferred taxes are due on the dates indicated above.
- Payroll tax deferral and Paid Leave/FMLA & Employer Retention Credits – employers get relief from failure to deposit penalties related to employment taxes (including taxes withheld) if they anticipate mandated paid sick/FMLA leave credits (FFCR Act) or Employer Retention Credits (CARES Act). The Payroll Tax deferral described above is in addition to these provisions and is available to all employers. Paid Leave/FMLA & Employer Retention Credits have limited application.