On June 26, 2020, the Internal Revenue Service (IRS) posted updated instructions for Form 941 to accompany the revised Form 941 issued by the IRS on June 19, 2020. Both the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided for credits against certain employer payroll tax liabilities. Additionally, the CARES Act allowed employers to defer payment of the employer Federal Insurance Contributions Act (FICA) tax liability otherwise required to be deposited on or after March 27, 2020, and before Jan. 1, 2021 (the Deferral Period). Significant changes to the Form 941 and accompanying instructions were required in order to provide for these recent legislative changes.
Some employers wishing to defer employer FICA tax may be unpleasantly surprised
Under the CARES Act, the employer’s FICA tax liability incurred during the Deferral Period is effectively due in two installments: one-half of the incurred liability is due by Dec. 31, 2021, and the remaining balance is due by Dec. 31, 2022.
However, the newly posted Form 941 instructions specific to the computation and reporting for the deferral of the employer FICA tax liability may catch some employers by surprise. Specifically, the “Tip” accompanying instructions for Line 13b of Form 941 (where the deferred amount is reported) includes the following statement:
“The deferred amount of the employer share of social security tax is a deferral of deposits and payments and not a deferral of liability. You won’t receive a refund or credit of any amount of the employer social security tax already deposited or paid for the quarter.”
Effectively, this means employers who intend to take advantage of the deferral but who failed to fully reduce their 941 deposits made for the quarter may find themselves unable to take advantage of the full deferral provided for by the CARES Act.
This statement within the instructions indicating that a refund or credit will not be allowed is likely based upon the application of existing law. Internal Revenue Code (IRC) Section 6403 requires that in the case of a tax due in installments, an overpayment of any installment shall first be applied against unpaid installments. Overpayments are credited or refunded under this statute only when the amount already paid exceeds the correct amount of the tax.
Accordingly, the accompanying instructions for Line 13b of Form 941 compute the allowable deferral by having employers reduce the total employer FICA tax liabilities for the quarter by the amount their 941 deposits for the quarter exceed their total non-employer FICA tax liabilities (before application of FFCRA and CARES Act credits) for the quarter.
Consider the following illustration:
Employer A wishes to defer the maximum amount of second quarter employer FICA tax under the CARES Act.
However, Employer A is uncertain how to compute the amount of allowable deferral. Employer A is also unsure how the computation of the allowable amount will be impacted by any credits the business might be allowed and the effects, if any, of the business having obtained a Paycheck Protection Program (PPP) loan. Additionally, the employee normally handling payroll tax matters has been furloughed as a cost saving measure while the business cannot be at full operational capacity. Employer A is quite busy trying to understand and comply with the COVID-19 governmental orders directly impacting the business operations. Due to the costly nature of failure to deposit penalties, Employer A decides to take precaution and make deposit of the full amount reported out by Employer A’s payroll software to be safe. Employer A anticipates being able to handle the situation with the assistance of its CPA when preparing the second quarter Form 941. Employer A expects that this strategy will allow the business to utilize the intended cash flow benefits of the deferral upon filing of its second quarter Form 941.
The relevant liabilities and credits of Employer A for the second quarter were as follows:
Employer A made second quarter 941 deposits as follows:
Employer A’s FICA tax deferral to be reported on Line 13b of Form 941 is computed as follows:
In this scenario, Employer A will generally not be able to defer any employer FICA tax for the second quarter and will not receive a refund or a credit against next quarter’s liabilities for the amount of employer FICA tax it has paid. Per the Form 941 instructions, Employer A will still have an overpayment of $30,000 resulting from the retention credits which will be refundable or creditable as an overpayment to the following quarter.
Potential remediation options
To the extent that an employer has not yet made deposits for the entire quarter (for example, a monthly schedule depositor with June payment not yet due until July 15), the employer may be able to reduce the last 941 payment for all or a portion of the employer FICA tax for the quarter, thereby preserving a deferral.
Additionally, in some cases employers may be able to re-designate one or more of the deposits made as being third quarter deposits. Generally, in the case of voluntary payments made to the IRS, taxpayers have the right to direct application of the payments to the liability they choose. In several lower court rulings, the courts have held that taxpayers have an absolute right of designation if made timely and that this right does not evaporate until the expiration of the relevant period for filing return.
The electronic deposit regulations prohibit an employer from being able to designate a single deposit as being for multiple return periods. This rule makes it unlikely that employers utilizing re-designation will be able to recognize the exact maximum deferral amount for the second quarter. Employers will need to carefully evaluate the impact of re-designating a particular deposit to ensure they do not inadvertently trigger any failure to deposit penalties.
Employers considering re-designation will want to consult with their tax advisor regarding applicability, steps to effect a re-designation, and the potential interaction with other payroll deposit requirements.