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August 4, 2020
2020-1974

IRS updates frequently asked questions about the CARES Act Social Security tax deferral

On July 30, 2020, the IRS added numerous frequently asked questions (FAQs) to clarify the requirements that apply to the Social Security tax deferral option allowed under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

Of significant note, employers that claimed the CARES Act Social Security tax deferral in the 2020 first quarter for the period March 27, 2020, to March 31, 2020, will receive an IRS notice concerning a deposit deficiency and employers will need to explain the shortage as due to the Social Security tax deferral. The IRS is likely using this procedure because there is no way to correct liabilities reported on Form 941 and comparable employment tax returns.

The updated FAQs do not provide further information on how or if employers can claim the deferral for the 2020 first quarter as allowed under the CARES Act.

Background

The CARES Act delays the timing of required federal employment tax deposits for certain employer payroll taxes and self-employment taxes incurred between March 27, 2020 (the date of enactment) and December 31, 2020. Amounts will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021, and the remainder by December 31, 2022. (For more information see EY Tax Alert 2020-0944.)

All employers and self-employed individuals may avail themselves of the payroll tax deposit deferral. There is no need-based eligibility and this provision alone should provide positive cash flow to businesses on an interest-free basis, as there is no interest charge for the deferral.

Applicable employment taxes include:

  • The employer's share of Old-Age, Survivors, and Disability Insurance Tax (Social Security) under IRC Section 3111(a), which is 6.2% of wages up to the wage base ($137,700 in 2020)
  • The portion of the employer's and the employee's representative share of Tier 1 RRTA tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate due
  • For self-employed individuals, the equivalent amount of Self-Employment Contributions Act (SECA) tax due on net earnings from self-employment under IRC Section 1401(a) (i.e., 50% of the 12.4% tax), which would similarly be exempt from estimated tax payments

Deferral is available for employers remitting payroll taxes through an agent under IRC Section 3504 or a CPEO. In these cases, the employer can direct the agent or CPEO to defer the applicable tax payments. Employers will be solely liable for making the deposits timely under the deferred deadlines, including with respect to worksite employees performing services for a CPEO customer.

There is no dollar cap on the wages that are counted in calculating the taxes that may be deferred.

The payroll tax deferral does not apply to federal income tax withholding, the Hospital Insurance (Medicare) tax or the employee's portion of Social Security tax.

On June 26, 2020, the IRS announced it had updated its frequently asked questions (FAQs) concerning the Social Security tax deferral option to reflect legislative changes enacted on June 5, 2020 under the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act; Pub. Law 116-142).

Specifically, FAQs 3, 4 and 5 are updated to reflect that businesses taking loans under the Paycheck Protection Program (PPP) are no longer precluded from exercising the option to defer payment of the employer portion of Social Security as provided under the CARES Act, even if those loan balances are later forgiven.

The fields necessary for reporting the Social Security tax deferral are reflected in the final instructions starting with the 2020 second quarter Form 941.

IRS to send reminder notices of the deferred amount and payment due date

In FAQ 20 the IRS states that it intends to issue a reminder notice to employers before each applicable due date of the Social Security tax deferral (December 31, 2021 and December 31, 2022).

Because each return period is treated separately for purposes of determining the amount of tax due for the period, Form 941 filers that deferred in all four quarters of 2020 may receive four reminder notices stating the deferred amounts that are due on the applicable dates in 2021 and 2022, even though the amounts for all four quarters will have the same due dates of December 31, 2021 and December 31, 2022.

Deferral of Social Security tax for the 2020 first quarter

IRS notices to be sent to employers that claimed the deferral in 2020 first quarter

In FAQ 6, the IRS reiterates that the 2020 first-quarter Form 941 was not updated with fields for employers to report the CARES Act Social Security deferral for the period March 27, 2020, through March 31, 2020, nor can employers report deferrals for the 2020 first quarter on Forms 941 for subsequent quarters in 2020.

Accordingly, employers that deferred deposits of the employer's share of Social Security tax for the first calendar quarter of 2020 will have a discrepancy on their first-quarter Form 941 between the amount of the liability reported and the deposits and payments made for that quarter.

The IRS states that it will send a notice to these employers identifying the difference between the liability reported on Form 941 for the first calendar quarter and the deposits and payments made for the first calendar quarter as an unresolved amount.

This notice will include additional information instructing the employer on how to inform the IRS that it deferred deposit or payment of the employer's share of Social Security tax for the period March 27, 2020 to March 31, 2020, pursuant to the CARES Act.

Repaying the Social Security tax deferral before the required due date

In FAQ 29 the IRS explains how employers pay the Social Security tax deferral before the required due date (50% by December 31, 2021 and the remainder by December 31, 2022).

Specifically, the employer may pay the deferred amount using the Electronic Fund Transfer Payment System (EFTPS), credit or debit card, or with a check or money order. The preferred method of payment is EFTPS.

If an employer is using EFTPS to pay the deferred amount and files Form 941, the employer should select Form 941, the calendar quarter in 2020 to which its payment relates and the category "payment due on an IRS notice in EFTPS." An employer that files annual returns, like the Form 943, 944, or CT-1, should select the return and 2020 tax year to make a payment.

For more information, visit EFTPS.gov, or call +1 800 555 4477 or +1 800 733 4829 (TDD).

Example: If an employer that files Form 941 wants to pay $300 of its deferred employer's share of Social Security tax, $100 of which is attributable to the second calendar quarter of 2020, and the other $200 of which is attributable to the third calendar quarter of 2020, the employer must make two payments through EFTPS. Each payment should be made for the calendar quarter to which the deferral is attributable, and the entry in EFTPS must reflect that it as a payment due on an IRS notice. Thus, the employer would pay $100 for the second calendar quarter of 2020 using EFTPS and select "payment due on an IRS notice" in EFTPS while doing so and would also separately pay $200 for the third calendar quarter of 2020 using EFTPS and make the same selection.

Reversing Social Security tax deferrals within the same reporting period

Form 941

In FAQ 28 the IRS explains that an employer that is either a monthly or semi-weekly depositor and that defers the employer's share of Social Security tax from one deposit in the second, third or fourth calendar quarter of 2020, but deposits it in a subsequent deposit during the same calendar quarter, should not complete line 13b of Form 941. The employer should report the amount deposited as the liability on Form 941 (for a monthly depositor) or on Form 941, Schedule B, Report of Tax Liability for Semiweekly Depositors (for a semiweekly depositor) on the date of the deposit to avoid assessment of failure to deposit penalties.

Example: Assume an employer is a Form 941 filer and a semi-weekly depositor that has an employment tax liability of $10,000 every two weeks in the second calendar quarter. Also assume the employer defers $2,480 of the employer's share of Social Security tax from its first deposit but deposits the amount of $2,480 with its last deposit of $10,000 during the same calendar quarter. This employer would report $7,520 for its first tax liability on its Form 941, Schedule B ($10,000 minus $2,480) and $12,480 for its last liability on its Form 941, Schedule B ($10,000 plus $2,480).

Annual filers (Form CT-1 and Form 943)

Form CT-1 filers and Form 943 filers that defer the employer's share of Social Security tax (or equivalent share of the Tier 1 employer tax) and subsequently deposit that deferred amount during 2020 should report the amount deposited as the liability on Form CT-1 (for monthly depositors), Form 945-A, Annual Record of Federal Tax Liability (for semiweekly depositors), Form 943 (for monthly depositors), or Form 943-A, Agricultural Employer's Record of Federal Tax Liability (for semiweekly depositors). These employers should not report any portion of the deferred amount of the employer's Social Security taxes (or equivalent share of the Tier 1 employer tax) on the CT-1 or Form 943 itself, if the employer is a semi-weekly depositor.

If the employer is a monthly depositor, the employer should report the amount of the deposit on the date of the deposit and not the liability in the Monthly Summary of Railroad Retirement Tax Liability for monthly railroad depositors or in the Monthly Summary of Federal Tax Liability for agricultural employers, as applicable.

Retroactive application of the Social Security tax deferral

In FAQ 8 the IRS confirms that employers cannot defer a balance due of the employer's share of Social Security taxes if the balance due was a tax liability imposed on wages paid prior to the payroll tax deferral period and for which the deposit of the tax was originally due prior to the payroll tax deferral period.

Employers may defer only the employer's share of Social Security tax that is equal to or less than their liability for the employer's share of Social Security tax that was due to be deposited during the payroll tax deferral period or was for payment due on wages paid during the payroll tax deferral period.

In FAQ 9 the IRS states that an employer cannot choose to defer payment of the employer share of Social Security tax for a previous quarter in order to obtain a refund of that Social Security tax.

Employers that have already deposited all or any portion of the employer's share of Social Security tax during the payroll tax deferral period may not subsequently defer payment of the tax already deposited and generate an overpayment of tax, including for the first calendar quarter.

The IRS notes that to the extent the employer reduces its liability for all or part of the employer's share of Social Security tax based on credits claimed on the Form 941, including the Research Payroll Tax Credit, the Families First Coronavirus Response Act (FFCRA) paid leave credits, and the CARES Act employee retention credit, and has an overpayment of tax because the employer did not reduce deposits in anticipation of these credits, the employer may receive a refund of Social Security tax already deposited.

In FAQ 31 the IRS states that employers that have already paid the employer's share of Social Security tax on wages during the payroll tax deferral period may not subsequently defer the payment of the tax by filing a Form 941-X to claim a refund or credit of the tax, including for the first calendar quarter. However, the employer may file a Form 941-X to apply a credit (including the FFCRA paid leave credits and the employee retention credit) against some or all of the employer's share of Social Security tax and claim a refund or credit of the tax on that basis.

Federal employment tax deposits and the Social Security tax deferral

Reducing the federal employment tax deposit

In FAQ 5 the IRS explains that an employer defers the employer's share of Social Security tax by reducing required deposits or payments for a calendar quarter (or other employment tax return period) by an amount up to the maximum amount of the employer's share of Social Security tax for the return period to the extent the return period falls within the payroll tax deferral period. The reduction in the federal employment tax deposit does not have to be applied evenly during the return period.

Example: If an employer will have $20,000 in total liability for the employer's share of Social Security tax for the third calendar quarter of 2020, has not yet reduced its deposits for the deferral, and has one deposit of $20,000 remaining for that calendar quarter, the employer may defer the entire $20,000 deposit.

EFTPS reporting

In FAQ 5 the IRS also explains that employers entitled to the employment tax credits and the Social Security tax deferral may leave the employment tax subcategory amounts (e.g., Social Security tax, Medicare tax, income tax withholding) attributable to this further reduction blank on the EFTPS worksheet. These EFTPS entries are for informational purposes, and the IRS generally does not use that information in determining whether payroll tax was deposited for purposes of the payroll tax deferral.

For more information see FAQ 12, Is the ability to defer deposit and payment of the employer's share of Social Security tax in addition to the relief provided in Notice 2020-22 for deposit of employment taxes in anticipation of the FFCRA paid leave credits and the employee retention credit?

The next-day $100,000-deposit rule

In FAQ 16 the IRS explains that the CARES Act Social Security tax deferral is a deferral of deposits, not a deferral of the tax liability. Accordingly, the $100,000 next-day deposit rule must be applied without regard to the deferral of the employer's share of Social Security tax. However, the amount deposited may be reduced by the deferred portion of the employer's share of Social Security taxes.

Example: If an employer accumulates $110,000 of employment tax liabilities (including federal income tax withholding and the employees' share of Social Security tax) and defers deposit of $20,000 for the employer's share of Social Security tax, the employer must still deposit the next day under the $100,000 rule but is only required to deposit $90,000 ($110,000 minus $20,000).

Likewise, in FAQ 17 the IRS states that the FFCRA paid leave credits and the CARES Act employee retention credit are applied against the employer's share of Social Security tax imposed on wages paid for the calendar quarter and the excess is treated as an overpayment that is refunded under IRC Section 6402. Accordingly, the credits are applied against the tax imposed. They do not reduce an employer's tax liabilities for purposes of determining the employer's deposit schedule overall or applying the $100,000 next-day deposit rule specifically. However, in accordance with Notice 2020-22, an employer may reduce its deposits in anticipation of the credits.

Example: If an employer accumulates $110,000 of liabilities and anticipates a $20,000 employee retention credit, the employer must still deposit the next day under the $100,000 next-day deposit rule but is only required to deposit $90,000. If the employer also defers the employer's share of Social Security taxes, the next-day deposit will also be reduced by the amount of the employer's share of Social Security taxes deferred.

Deferral of Social Security tax and the Research Payroll tax Credit

In FAQ 14 the IRS confirms that an employer is entitled to defer deposit and payment of the employer's share of Social Security tax prior to applying the Research Payroll Tax Credit against the employer's liability for the employer's share of Social Security tax. Furthermore, an employer may claim the Research Payroll Tax Credit without regard to whether the employer has deferred deposit and payment of some or all of the employer's share of Social Security tax.

If the amount of the Research Payroll Tax Credit the employer is entitled to exceeds the employer's liability for the employer's share of Social Security tax for the calendar quarter (or other employment tax return period), including any amount of the employer's share of Social Security tax that the employer has deferred for the calendar quarter, the employer may carry over to subsequent calendar quarters the excess remaining at the end of the calendar quarter that has not been used completely because it exceeds the amount of the employer's share of Social Security tax liability.

Employers claiming the Research Payroll Tax Credit must file Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities and must attach it to their employment tax return (typically Form 941).

When completing line 8 of Form 8974, employers should not include any qualified sick leave wages reported on line 5a(i), or qualified family leave wages reported on line 5a(ii), of Form 941.

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Contact Information
For additional information concerning this Alert, please contact:
 
Workforce Tax Services - Employment Tax Advisory Services
   • Kenneth Hausser (kenneth.hausser@ey.com)
   • Debera Salam (debera.salam@ey.com)
   • Kristie Lowery (kristie.lowery@ey.com)
   • Peter Berard (peter.berard@ey.com)

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