IRS Clarifies Interplay Between Employment Tax Deferral and Loan Forgiveness
On Friday, April 10, 2020, the IRS launched a new frequently asked questions (FAQ) page on the deferral of employment tax deposits and payments. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allows employers to defer the deposit and payment of the employer’s share of social security taxes and self-employed individuals to defer payment of certain self-employment taxes between March 27, 2020, and January 1, 2021. As discussed in our previous blog post, payment of half of these deferred amounts would not become due until December 31, 2021. The second half would be due a year later on December 31, 2022.
Such deferral is, however, prohibited for an employer who receives loan forgiveness under the CARES Paycheck Protection Program (“PPP”). Because the language of the CARES Act makes clear that employment-tax deferral is not disallowed until PPP loan forgiveness actually occurs, it appeared that employers could currently take advantage of such deferral while in the midst of the loan application and forgiveness processes. What remained more uncertain was how the IRS planned to treat previously deferred employment-tax payments once an employer did receive a decision that its lender would forgive the loan.
Question 4 of the FAQ clarifies this interplay between the employment-tax deferral and PPP loan forgiveness as follows:
- 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.
- Employers who do so will not incur 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.
- 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” (50% on December 31, 2021, and the remaining amount on December 31, 2022).
The IRS has ensured that information will be provided in the near future 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 through March 2020). Employers will not be required to make a special election to be able to defer deposits and payments of these employment taxes.
The FAQ also makes clear that the ability to defer deposit and payment of the employer’s share of social security tax is in addition to the relief provided in Notice 2020—22, which provides relief from the failure-to-deposit penalty for not making deposits of employment taxes (including taxes withheld from employees) in anticipation of the Families First Coronavirus Relief Act (FFCRA) paid leave credits and the CARES Act Employee Retention Tax Credit (ERTC). An employer is therefore entitled to defer deposit and payment of its share of social security tax prior to:
- determining whether it is entitled to the paid leave credits under the FFCRA or the ERTC;
- determining the amount of employment tax deposits that it may retain in anticipation of these credits (FFCRA and ERTC), the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits; and
- receiving a determination of PPP loan forgiveness from its lender.
Keep in mind that an employer who has received a loan under the PPP is not eligible for the ERTC. The FAQ, however, essentially provides that employers can defer deposit and payment of their share of social security tax while in limbo with any of these relief provisions. Additionally, while deferral in anticipation of the ERTC may not be warranted (i.e., because an employer has already received a PPP loan), general deferral would still be permissible until that employer receives official notice of loan forgiveness.
Larger employers who are ineligible for the PPP loans, or employers who choose not to apply for these loans, will be able to utilize both the ERTC (if eligible based on economic decline) and employment-tax deferral. The ERTC and other credits that reduce payroll taxes will reduce the amount eligible for deferral.