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Recently released IRS FAQs provide clarification for employers on applicable tax deferrals under the CARES Act. This insight can help employers make decisions on how to defer applicable taxes and conserve cash flow in the midst of the COVID-19 pandemic.

Regulations

Clarification: Deferral of Employment Tax Deposits and Payments Under CARES Act

  • Scott Hess
  • Chastity Wilson
  • 4/17/2020

Key insights

  • The IRS recently released FAQs clarifying applicable tax deferrals under the CARES Act in regard to PPP loans, FFCRA tax credits, and CARES Act employee retention credits.
  • Taking advantage of these deferrals can help employers maintain liquidity and conserve cash during the COVID-19 pandemic.

On Friday, April 10, the Internal Revenue Service (IRS) released frequently asked questions (FAQs) responding to the large quantity of questions employers had regarding the procedural requirements for implementing the deferral of employment taxes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The FAQs provide procedural guidance and answer other questions.

Applicable tax deferrals under CARES Act

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The CARES Act allows employers to defer payment of their share of the Social Security tax (6.2%) on employee wages. Self-employed individuals can defer 50% of certain self-employment taxes (the “applicable taxes”).

All employers are eligible for the deferral, regardless of whether the employer is affected by COVID-19. Unlike other provisions in the CARES Act, there is no minimum or maximum employer size requirement.

The deferral applies to applicable taxes that would otherwise be required during the period beginning on March 27, 2020, and ending on December 31, 2021. Half of the deferred applicable taxes must be paid no later than December 31, 2021, and the other half no later than December 31, 2022 (the “applicable dates”). If the deferred applicable taxes are paid by the “applicate dates,” the IRS will not assess interest or penalties.

There is one limitation. If an employer or self-employed individual receives a loan under the SBA Payroll Protection Program (PPP) and the loan is fully or partially forgiven, the employer is not eligible for the deferral of applicable taxes.

IRS FAQs addressing deferral of applicable taxes

Deferral of applicable taxes prior to PPP loan forgiveness

Employers commonly asked whether organizations could defer applicable taxes until their PPP loan was forgiven. The IRS states that employers who receive a PPP loan, but whose loan has not yet been forgiven, may defer applicable taxes until the date a lender issues a decision to forgive the PPP loan. Employers will not incur failure to deposit or failure to pay penalties on amounts deferred prior to the lender’s decision.

When an employer receives a decision from its lender forgiving a PPP loan, the employer is no longer eligible to defer applicable taxes. However, the applicable taxes deferred through the date the PPP loan is forgiven will continue to be due on the applicable dates.

Interaction between the deferral of applicable taxes, FFCRA tax credits, and the CARES Act employee retention credit

Employers that pay qualified sick leave and/or qualified family leave in accordance with the Families First Coronavirus Response Act (FFCRA) can receive refundable tax credits to help recoup the cost of providing qualified leave. The CARES Act also added a refundable employee retention credit that is available to employers whose operations are fully or partially suspended due to a COVID-19 related shutdown order, or whose gross receipts decline by more than 50% when compared to the same quarter in the prior year. See CLA’s procedural overview of COVID-19 employment tax credits.

There was uncertainty whether employers who claim FFCRA tax credits or the CARES Act employee retention credit could defer applicable taxes before determining the amount of deposits to retain in anticipation of the tax credits.

According to the IRS, an employer can defer applicable taxes prior to determining the amount of employment tax deposits it may retain in anticipation of the FFCRA tax credits, the CARES Act employee retention credit, the amount of any advance payment of these credits, or the amount of any refunds with respect to these credits.

Interaction between deferral of self-employment taxes and quarterly installments

Self-employed individuals questioned whether there would be a penalty for failure to make estimated tax payments associated with the deferred self-employment taxes. The IRS says no, the deferral of 50% of the social security tax on net earnings from self-employment income (“self-employment tax”) is not used to calculate quarterly estimated income tax payments during the deferral period.

Reporting the deferral of applicable taxes

The IRS stated in the FAQs that the Form 941, Employer QUARTERLY Federal Tax Return, will be revised for the second calendar quarter of 2020 (April 1, 2020 through June, 30 2020). The IRS also confirmed that there will be information released in the near future regarding how employers should reflect deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January 1, 2020 through March 30, 2020).

Deferral of applicable taxes can help conserve cash

The deferral of applicable taxes is not a tax holiday (i.e., a temporary reduction in or elimination of tax). The deferral, however, can help employers conserve cash and maintain liquidity during the COVID-19 pandemic. Since the deferral of applicable taxes is just that, a deferral, employers should take necessary steps to ensure deferred amounts are paid by the “applicable dates.” Employers also need to remember to cease the deferral of applicable taxes after they receive a decision that their PPP loan is forgiven.

How we can help

Unforeseen disruptions — from the coronavirus (COVID-19) to natural disasters — can create many uncertainties. CLA has developed resources to help you lay out a strategy to put your organization on its toes versus its heels. Bookmark our financial management and disaster relief resource page to stay current on these issues.

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  • Chastity Wilson
  • Managing Principal of Tax