Guidance on Payroll-tax Deferral
By Cheryl Fitzgerald
As we are all aware, 2020 has been a year of trials and tribulations, and the ever-changing way that we as a country have had to deal with the pandemic, even from a tax perspective.
The IRS has provided some relief, and in March 2020, tax relief came in the form of the Coronavirus Aid, Relief and Security (CARES) Act. This economic stimulus package provided support to individuals and businesses.
One of the items for businesses called for a delayed payment of certain employer payroll taxes. Taxpayers (including self-employed individuals) were able to defer paying the employer portion of Social Security (OASDI) payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. For self-employed individuals, the deferral applies to 50% of the FICA tax liability on their individual Form 1040.
Initially, this relief was not available if the taxpayer had debt forgiveness under the CARES Act for certain loans under the Small Business Acts as addressed by the CARES Act (PPP loans). However, in June 2020, the Paycheck Protection Program Flexibility (PPPF) Act was signed into law, and employers can now take advantage of this payroll-deferral provision.
“If all the deposits for applicable employment taxes are made by the applicable date, the employer will be treated as having made the timely deposits of these taxes.”
Generally, the IRS imposes penalties for any failure to deposit amounts as required by the Internal Revenue Code, unless there is reasonable cause and it is not due to willful neglect. This has been relaxed, and if all the deposits for applicable employment taxes are made by the applicable date, the employer will be treated as having made the timely deposits of these taxes that were required to be made during this deferral period. This deferral period is defined as the period beginning on March 20, 2020 and ending before Jan. 1, 2021.
For self-employed taxpayers, the payment of 50% of these payroll taxes won’t be due before their individual returns are required to be filed.
The IRS has explained that the deferral of the Social Security tax was to be made by reducing the required deposits or payments for a calendar quarter. The reduction did not need to be applied evenly during the return period. The IRS notes that, while the Electronic Funds Transfer Payment System requires an employer to identify deposits by tax subcategory (i.e., Social Security tax, Medicare tax, income-tax withholding), they will not use this information in regard to the deferral. Employers that qualify for credits against the employer’s share of Social Security tax for paid sick leave, paid family leave, or employee retention credit may leave the tax subcategory amounts blank on the worksheet.
The payroll forms were not revised in time for the first-quarter reporting, and employers were advised to report first-quarter activity related to the COVID-19 credits and the deferral of employment tax on the revised version of the payroll forms released for use in subsequent quarters.
The IRS FAQs clarify that the deferral is not a deferral of tax liability; therefore, if the employer accumulates $100,000 or more in employment, the employer must still deposit the employment taxes the next day. However, the deposit may be reduced by the deferred portion of the employer’s Social Security tax.
The IRS stated that it intends to issue reminder notices to employers before each applicable due date reflecting the total amount of deferred taxes and the payment due dates. Form 941 (quarterly payroll tax form) filers will receive four reminder notices if they defer for all four quarters, stating what deferred amounts are due in 2021 and 2022.
Unfortunately, if an employer made tax deposits in full, the employer cannot claim a refund or credit on its Form 941 for a deferral. However, to the extent the employer did not reduce the deposits for credits claimed on Form 941 for other related COVID-19-related payroll credits, the employer may receive a refund of Social Security tax already deposited. Employers may not file an amended Form 941 to claim a refund or credit when the employer paid the employer’s share of Social Security tax during the payroll tax-deferral period including the first quarter of 2020.
Some of the decisions about the deferral had to have been made during 2020 while completing your quarterly payroll tax returns. Payroll companies should have been able to help determine the amounts that could have been deferred and when the payments would have to be made. However, you may want to discuss with your tax advisor regarding the timing of the deductibility of these expenses, particularly with the Consolidated Appropriations Act signed in the end of December 2020 regarding the deductibility of the expenses used with PPP money.
In other payroll-related guidance, included in a memorandum issued by President Trump in August 2020, employers were allowed to let employees defer their share of FICA payroll taxes from Sept. 1, 2020 through Dec. 31, 2020 and repay these amounts ratably from Jan. 1, 2021 through April 31, 2021. The Consolidaed Appropriations Act signed in late December 2020 extended the payback period of these taxes through Dec. 31, 2021.
Cheryl Fitzgerald is a senior manager at the Holyoke-based accounting firm Meyers Brothers Kalicka; (413) 536-8510.