COVID-19 Employer Tax Relief Available for PPP Borrowers

President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions.

On April 10, 2020 the IRS announced that borrowers participating in the Paycheck Protection Program (PPP) which provides low interest rates and possible tax-free loan forgiveness, are also eligible to defer paying the employer portion of social security payroll taxes from March 27, 2020 until their PPP loan is forgiven.

The amount of the deposit and payment of the employer’s share of social security tax that is deferred until loan forgiveness will be payable in two installments: 50% due on December 31, 2021 and the remainder on December 31, 2022.

What deposits and payments of employment taxes are employers entitled to defer?

Section 2302 of the CARES Act provides that employers may defer the deposit and payment of the employer’s portion of social security taxes and certain railroad retirement taxes. These are the taxes imposed under section 3111(a) of the Internal Revenue Code (the “Code”) and, for Railroad employers, so much of the taxes imposed under section 3221(a) of the Code as are attributable to the rate in effect under section 3111(a) of the Code (collectively referred to as the “employer’s share of social security tax”). Employers that received a PPP loan may not defer the deposit and payment of the employer’s share of social security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven.

When can employers begin deferring deposit and payment of the employer’s share of social security tax without incurring failure to deposit and failure to pay penalties?

The deferral applies to deposits and payments of the employer’s share of social security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the “payroll tax deferral period.”)

IRS states that the Form 941, Employer’s QUARTERLY Federal Tax Return, will be revised for the second calendar quarter of 2020 (April – June, 2020) and the IRS will provide information to instruct employers how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January – March 2020).  In no case will Employers be required to make a special election to be able to defer deposits and payments of these employment taxes.

Which employers may defer deposit and payment of the employer’s share of social security tax without incurring failure to deposit and failure to pay penalties?

All employers may defer the deposit and payment of the employer’s share of social security tax. However, employers that receive a loan under the Small Business Administration Act, as provided in section 1102 of the CARES Act (the Paycheck Protection Program), may not defer the deposit and payment of the employer’s share of social security tax due on or after the date that the PPP loan is forgiven under the CARES Act.

Can an employer that has applied for and received a PPP loan that is not yet forgiven defer deposit and payment of the employer’s share of social security tax without incurring failure to deposit and failure to pay penalties?

Yes. Employers who have 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. 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” as described below.

Is this ability to defer deposits of the employer’s share of social security tax in addition to the relief provided in IRS Notice 2020-22 for deposit of employment taxes in anticipation of the Families First Coronavirus Relief Act (FFCRA) paid leave credits and the CARES Act employee retention credit?

Yes. IRS Notice 2020-22 provides relief from the failure to deposit penalty under section 6656 of the Code for not making deposits of employment taxes, including taxes withheld from employees, in anticipation of the FFCRA paid leave credits and the CARES Act employee retention credit. The ability to defer deposit and payment of the employer’s share of social security tax under section 2302 of the CARES Act applies to all employers, not just employers entitled to paid leave credits and employee retention credits.

Can an employer that is eligible to claim refundable paid leave tax credits or the employee retention credit defer its deposit and payment of the employer’s share of social security tax prior to determining the amount of employment tax deposits that it may retain in anticipation of these credits, the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits?

Yes. An employer is entitled to defer deposit and payment of the employer’s share of social security tax prior to determining whether the employer is entitled to the paid leave credits under sections 7001 or 7003 of FFCRA or the employee retention credit under section 2301 of the CARES Act, and prior to determining the amount of employment tax deposits that it may retain in anticipation of these credits, the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits.

What are the applicable dates by which deferred deposits of the employer’s share of social security tax must be deposited to be treated as timely (and avoid a failure to deposit penalty)?

The deferred deposits of the employer’s share of social security tax must be deposited by the following dates (referred to as the “applicable dates”) to be treated as timely (and avoid a failure to deposit penalty):

1. On December 31, 2021, 50% of the deferred amount; and
2. On December 31, 2022, the remaining amount.

What are the applicable dates when deferred payment of the employer’s share of social security tax must be paid (to avoid a failure to pay penalty under section 6651 of the Code)?

The deferred payment of the employer’s share of social security tax is due as follows:

1. On December 31, 2021, 50% of the deferred amount; and
2. On December 31, 2022, the remaining amount.

Are self-employed individuals eligible to defer payment of self-employment tax on net earnings from self-employment income?

Yes. Self-employed individuals may defer the payment of 50% of the social security tax on net earnings from self-employment income imposed under section 1401(a) of the Code for the period beginning on March 27, 2020, and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the “payroll tax deferral period”).

Is there a penalty for failure to make estimated tax payments for 50% of social security tax on net earnings from self-employment income during the payroll tax deferral period? 

No. For any taxable year that includes any part of the payroll tax deferral period, 50% of the social security tax imposed on net earnings from self-employment income during that payroll tax deferral period is not used to calculate the installments of estimated tax due under section 6654 of the Code.

What are the applicable dates when deferred payment amounts of 50% of the social security tax imposed on self-employment income must be paid?

The deferred payment amounts are due as follows:

1. On December 31, 2021, 50% of the deferred amount; and
2. On December 31, 2022, the remaining amount.

Click here for COVID-19 Tax Relief measures instituted by the IRS in “The IRS People First Initiative” that can benefit you.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes and with these tax law changes it is possible that business can claim refunds now by filing an amended return.  If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Northern California (including Sacramento, San Francisco and San Jose) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.