The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows employers to defer the deposit and payment of their share of Social Security taxes (OASDI, but not Medicare) and self-employed individuals to defer a portion of their self-employment taxes. The IRS recently published FAQs addressing specific questions about deferral of these taxes.
1. Clarification for Employers Relating to Deferrals. The CARES Act allows all employers to defer their share of Social Security taxes that would otherwise be required to be made between March 27, 2020 through December 31, 2020. There is no deferral of income tax withholding, withholding of the employee’s portion of Social Security taxes, or the employer and employee portion of Medicare taxes. The deferred payments will be deemed to be made timely (and will not be subject to any failure to deposit or failure to pay penalty) so long as 50% of the deferred amounts are paid by December 31, 2021, and the remaining amounts are paid by December 31, 2022. The IRS will revise Form 941, Employer Quarterly Federal Tax Return, for the second calendar quarter of 2020, and will provide additional instructions to employers on how to reflect any deferred deposits and payments otherwise due on or after March 27, 2020. Employers are not required to make any kind of special election in order to defer their share of Social Security taxes.
2. Clarification for Employers Participating in the Payroll Protection Program. Employers who receive a loan under the Paycheck Protection Program (“PPP”) are eligible to defer their share of Social Security taxes due for the period beginning on March 27, 2020, and ending on the date that the lender issues the employer its decision to forgive the loan. An employer may not defer the deposit and payment of its share of the Social Security tax due on or after the date the employer receives a notice from the lender that its PPP loan has been forgiven. But, any amounts deferred through the date the loan is forgiven continue to be deferred without penalty provided they are paid by the applicable deferred payment dates (i.e., December 31, 2021 for 50% of the deferred amount and December 31, 2022 for the remaining amount).
3. Clarification for Employers Eligible for a Tax Credit under the Families First Coronavirus Response Act (“FFCRA”) or the CARES Act. An employer is entitled to defer the deposit and payment of its share of Social Security taxes before the employer knows whether it is entitled to any paid leave credits under FFCRA or the employee retention credit under the CARES Act and before it knows the amount of tax deposits it may retain in anticipation of the credits or the amount of any refund it may receive. However, the deferral is only applicable to the extent the credit for an applicable quarter does not exceed the employer’s portion of Social Security taxes for such quarter. If the credit exceeds the employer’s share of Social Security taxes, the deferral is irrelevant.
4. Clarification for Self-Employed Individuals. Self-employed individuals may defer the payment of 50% of Social Security taxes on net earnings from self-employment income for the period beginning on March 27, 2020, and ending on December 31, 2020, and such deferred amount is not used to calculate the installments of estimated tax due. Fifty percent of deferred amounts are due on December 31, 2021 and the remaining amounts are due on December 31, 2022.
As you are aware, things are changing quickly and the aid measures and interpretations described here may change. This article represents our best understanding and interpretation based on where things currently stand.
If you have any questions regarding this information, please contact Claudia Hinsch at (202) 747-1948, Martin J. Smith at (213) 617-5490, Michael Chan at (213) 617-5537, Dmitriy Chelnitsky at (212) 634-3024, or Michael Weisshar at (213) 617-4211.
This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments and does not form an attorney client relationship . The information provided herein does not constitute tax advice and may not be relied upon for avoidance of tax penalties or for any other purpose. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.