Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27 in response to the rapid spread of COVID-19, commonly known as the Coronavirus, in the United States. The CARES Act includes over $2 trillion in economic relief for American workers and businesses adversely affected by the pandemic. A key benefit of the CARES Act is the deferral of some tax payments due through the end of 2020, with employers being allowed to defer payment of those taxes into 2021-22, as explained below.
Employers with an employment tax liability over $2,500 must typically deposit taxes on a monthly, semi-weekly, or next day basis, depending on the amount. The CARES Act presents an opportunity to delay these payments without penalty. Under Section 2302 of the CARES Act, employers can defer the deposit and payment of their portion of Social Security taxes through December 31, 2020. While the deferral rules are relatively straightforward, many are uncertain as to how the CARES Act affects them. Below, we’ll review key details of the CARES Act so you can understand your eligibility and next steps for tax deferrals.
The Cares Act Specifics
The CARES Act allows all U.S. employers to defer both the deposit and the payment of their share of Social Security tax. This rule also applies to government entities, employers that use third parties to report and pay employment taxes to the IRS, employers that file annual employment tax returns, and household employers that file Schedule H for taxes on wages paid. Self-employed individuals may also defer 50 percent of Social Security tax payments imposed on net earnings under section 1401(a) of the Internal Revenue Code.
Sections 2302(a)(1) and (a)(2) of the CARES Act allows employers to defer deposits and payments of Social Security tax due during the payroll tax deferral period, which runs from March 27, 2020 to December 31, 2020. To avoid penalty, employers must deposit 50 percent of the eligible deferred amount by December 31, 2021 and the remaining amount by December 31, 2022.
Thanks to the PPP Flexibility Act, a recent amendment to section 2302 of the CARES act, employers who receive Paycheck Protection Program (PPP) loans may defer the deposit and payment of their Social Security tax, even if their loan is forgiven by the lender. The PPP Flexibility Act, enacted on June 5, struck a rule that would have prevented employers whose PPP loans were forgiven, in whole or in part, from benefitting from the deferral.
The CARES Act Exceptions
While many employers are eligible for tax deferrals under the CARES Act, there are some exceptions. The IRS recently created a Coronavirus tax relief FAQ page to clear up the confusion surrounding deferral eligibility. Here we will outline employers who are not covered by the CARES Act as it pertains to Social Security tax deferrals.
The CARES Act only offers tax relief for employers during the tax deferral period. Employers are not eligible for deferrals on tax liabilities due prior to March 27. Employers are also not allowed to claim a refund or credit for Social Security tax that has already been paid for the tax year 2020. For example, let’s say you paid a portion or all of your Social Security tax due for the year back in quarter one. According to section 2302(a) of the CARES Act, you may not file a Form 941-X to claim a refund or credit on the tax paid. However, you can use Form 941-X to file a refund if you qualify for Families First Coronavirus Response Act (FFCRA) paid leave tax credits or employee retention credits.
The CARES Act section 2302(a)(2) defers deposits, not tax liability. Therefore, employers that accumulate a $100,000+ tax liability on any day during a deposit period must continue to abide by the “next-day deposit rule.” However, the amount deposited may be reduced by the deferred portion of the employer’s share of Social Security taxes. In addition, the FFCRA paid leave tax credits and employee retention credits may be applied against the employer’s share of Social Security tax on wages for the calendar quarter and the excess is treated as an overpayment to be refunded under section 6402.
How to Defer Tax Payments
To defer tax payments, simply reduce your required deposits or payments by an amount up to the maximum value of your share of Social Security tax for a return period. For example, let’s say you have a $35,000 Social Security tax liability for the third quarter of 2020. You can defer the entire amount remaining to be deposited up to the full $35,000 liability. You can still make reduced payments now if you want to limit your liability in the future.
You may also be eligible for tax credits that impact your Social Security tax, such as the paid leave credit under the FFCRA. Receiving these credits will reduce your required deposits. Visit the IRS’ COVID-19 tax credits page to learn more about qualifying for this tax credit.
You can make a payment using the Electronic Fund Transfer Payment System (EFTPS) by credit card, debit card, check, or money order. To report your tax deferral, use Form 941 for quarterly returns and Form 943, 944 or CT-1 for annual returns. Visit EFTPS.gov for more payment information.
The IRS did not revise the first quarter of 2020 on Form 941 to reflect the deferred deposits due on or after March 27, 2020. As a result, you will have inconsistencies on your Form 941 if you deferred Social Security tax deposits in the first quarter of 2020. The IRS will send you a notice with information on how to inform them of this discrepancy.
The CARES Act is a significant benefit for any employer looking to defer their tax payments. If your business is struggling in the wake of the Coronavirus, we’re here to help. Our attorneys are renowned for their ability to assist all types of business entities navigate the tax world. Contact us today to see how you can defer payments and, in many cases, reduce your overall tax liability.