IRS Issues Guidance on Social Security Tax Deferral under the CARES Act*

April 15, 2020

*Co-Authored by S. John Kelly

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) provided relief for employers in the form of deferral of the deposit and payment of the employer’s share of social security taxes on wages (6.2% of “wages”) that otherwise would be required to be deposited and paid during the period beginning March 27, 2020, and ending December 31, 2020. According to the CARES Act, fifty percent of the deferred tax is due December 31, 2021, and the remaining 50% is due December 31, 2022.  The deferral is claimed on the Form 941, starting with the Second Quarter of 2020.

The original reading of the deferral program indicated that any employer receiving a loan under the CARES Act’s Paycheck Protection Program (PPP) would be ineligible for the tax deferral.  However, on April 10, 2020, the IRS issued guidance (Q/A 4) addressing the deferral program and the PPP Loans, and clarified that an employer that has received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of social security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan in accordance with paragraph (g) of section 1106 of the CARES Act, without incurring failure to deposit and failure to pay penalties. The Guidance can be found at: https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020.

Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of social security tax due after that date. However, the amount of the deposit and payment of the employer’s share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates,” which is one-half of the deferred amount due on Dec 31, 2021 and the remaining amount on Dec 31, 2022.

This deferral may provide you with additional cash flow to address operational concerns.  If you have any questions about the PPP Program or the Social Security Tax deferral, please do not hesitate to contact Christopher Azzara (Chair of the Firm’s Banking, Creditors’ Rights, and Insolvency Group) at cazzara@smgglaw.com, or S. John Kelly at jkelly@smgglaw.com.