IRS Issues Guidance on the CARES Act Deferral of Employer Social Security Taxes

The IRS has issued additional guidance clarifying the CARES Act provision permitting employers to defer the employer share of social security taxes and certain railroad retirement taxes.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act,” “Act”), signed into law on March 27, 2020, contains several business relief provisions, including an employer payroll tax deferral.

The deferral does not apply to employee income tax withholding, the employee or employer portion of the Medicare tax, or the employee portion of the social security tax. There are no employer eligibility requirements with respect to deferral.

These deferred taxes apply to deposits and payments of the employer’s share of social security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020 (the “payroll tax deferral period”). The deferred taxes will be due and payable to the IRS in 50% installments on December 31, 2021, and December 31, 2022.

The recently issued guidance provides some insight into the application of key provisions of the law.

The law provides that the deferral does not apply to any taxpayer if the taxpayer has had indebtedness forgiven under this additional guidance pursuant to the Paycheck Protection Program (PPP) loan. While this language suggests that a taxpayer receiving PPP loan forgiveness cannot take advantage of the payroll tax deferral on any wages it paid, this is not the position taken by the Service.

The Service’s position states that employers who are recipients of a PPP loan may not defer the deposit and payment of the employer’s share of social security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven. This means that the employer can defer its share of the applicable taxes up to the date that a decision on loan forgiveness is received.

Furthermore, the Service states that the employer’s share of social security tax that is deferred prior to the date of loan forgiveness does not have to be paid when the employer becomes ineligible. The tax can remain deferred for the term of the deferral period noted above.

The guidance also confirms the ordering of the reduction of payroll tax deposits when an employer is deferring its share of payroll and is also receiving employment tax credits under the Families First Coronavirus Response Act (FFCRA), the emergency paid sick leave, FMLA, and the CARES Act Employee Retention Credit.

The employer should first determine the amount it is able to defer under the employer payroll tax deferral and then correspondingly reduce the employment tax deposit before any reductions for the FFCRA credit or the Employee Retention Credit.

A self-employed taxpayer is entitled to a comparable reduction in his or her self-employment taxes pertaining to 50% of social security tax on net earnings from self-employment for the period March 27, 2020, to December 31, 2020 (the “payroll tax deferral period”). The self-employed taxpayer can receive this benefit through a reduction of estimated taxes during the year. The guidance does not describe how the self-employment income for this period is to be determined. The Service will provide such details in the near future.

The IRS continues to provide guidance on several issues involving the CARES Act tax provisions. If you need assistance working through these new rules, contact your Marcum tax professional or contact Michael D’Addio at 203.781.9665 or email Michael.

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