On April 10, the Internal Revenue Service (IRS) published a Frequently Asked Questions (FAQ) site regarding the payroll tax deferral program. This program allows taxpayers to defer payment of the employer portion of Social Security tax incurred on wages paid between March 27, 2020 and Dec. 31, 2020. The tax liability deferred during this time period is due in two installments, with 50 percent due on Dec. 31, 2021, and the remaining 50 percent due on Dec. 31, 2022.
The IRS FAQ site addresses several major topics, including the ways in which applicants participating in the Paycheck Protection Program (PPP) under the Small Business Administration (SBA) 7(a) loan program may be able to take advantage of the payroll tax deferral. Key clarifications provided on the site are as follows:
Taxpayers receiving PPP funding may defer a portion of payroll taxes
The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act specifies that taxpayers receiving any amount of loan forgiveness on a PPP loan are not eligible for payroll tax deferral. The IRS FAQ site clarifies that taxpayers may defer the employer portion of Social Security on wages paid between March 27, 2020, and the date which the lender issues a confirmation of loan forgiveness. The Social Security taxes deferred before the date of any PPP loan forgiveness continue to be deferred and are due in December 2021 and December 2022.
Taxpayers with outstanding PPP applications or those who have received funds may begin taking advantage of this Payroll Tax Deferral program immediately, which may help with current cash needs.
Taxpayers may defer a portion of payroll taxes prior to determining eligibility for certain tax credits
Taxpayers eligible for payroll tax credits under the paid sick leave program and employee retention credit program must first apply these credits to offset their employer Social Security tax. Any excess of this tax may then be deferred under the payroll tax deferral program. For a detailed explanation of this process, refer to DHG’s Tax Alert published April 9.
According to the IRS FAQ, taxpayers may choose to defer their employer Social Security tax prior to determining eligibility for the payroll tax credits. In other words, taxpayers do not need to calculate their estimated credits each pay period throughout the quarter. Instead, they may defer the employer Social Security deposit each pay period, then report the amount of such tax related to payroll tax credits and the amount deferred on their quarterly Form 941 filing. This clarification is advantageous for taxpayers anticipating credits less than or equal to their employer Social Security.
Taxpayers anticipating large credits under either the paid sick leave or employee retention programs may want to consider continuing to estimate their credit amounts each pay period, as the opportunity for immediate additional cash savings may be worthwhile. For example, taxpayers may use excess paid sick leave credits and employee retention credits to reduce other payroll tax liabilities (i.e. Medicare tax or federal withholding). Further, if the credit amount exceeds the total payroll tax liability for a pay period, taxpayers may file Form 7200 to request an advance refund.
The IRS also confirmed that Form 941 will be updated for the second quarter to accommodate new COVID-19 related provisions, such as the paid sick leave credits, employee retention credits and the payroll tax deferral program.
Deferral of payroll taxes may impact the period in which a taxpayer can deduct these taxes. It is important to consider the timing impact of any deferrals when evaluating overall cash tax planning strategies.
For assistance with determining program eligibility, as well as calculating applicable tax credits and/or payroll tax deferral amounts, please contact DHG at TaxCARES@dhg.com.