June 30, 2020

Change in Deferral of Employment Tax Deposits and Payments Under the Paycheck Protection Program Flexibility Act

By Hui Zeng, Manager, Tax & Business Services

On June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) of 2020 was signed into law by President Trump. The Act, allows businesses who are Paycheck Protection Program (PPP) loan recipients to defer the employer share of the Social Security taxes through the end of 2020.

The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) provided that employers may defer the deposit and payment of the employer’s share of Social Security taxes and also permitted self-employed individuals to defer payment of certain self-employment taxes that would otherwise be required to be made during the period beginning on March 27, 2020 and ending December 31, 2020. This deferral is akin to an interest-free loan, as these delayed taxes must be repaid. Half of the deferred amount is due by December 31, 2021 and the balance is due by December 31, 2022.

Original Provision

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, businesses were eligible to delay certain employer paid payroll tax benefits. However, the CARES Act blocked businesses who have their PPP loan forgiven from taking advantage of this deferral. Under original guidance released pursuant to the CARES Act, employers who have received a PPP loan may only defer deposit and payment of the employer’s share of Social Security tax beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan 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 for the deferral.

Marcum Recommendation

Under the new provision, employers that received PPP loans can now defer or continue to defer their share of the Social Security tax through the end of this year. With this prohibition now lifted, all businesses may take advantage of the payroll tax deferral. Employers who wish to utilize this provision and increase current cash flow, should review the second quarter, which ends June 30, 2020, payroll taxes and hold off paying the employer share of the Social Security tax.

Per the IRS, the deferred amount of the employer share of social security tax is a deferral of deposits and payments, not a deferral of liability. Employers who have paid in their share of the social security tax for the first quarter won’t receive a refund or credit of any amount that was already deposited for a prior quarter.

However, for the second quarter, employers can file Form 941, due July 31, 2020, and claim the employer share of Social Security tax already paid as a credit. In the draft Form 941 instructions, which can be found at www.irs.gov, dated June 3, 2020, the IRS stated that in determining whether any amount of the employer share of social security tax was already deposited for this purpose, employers can consider prior deposits during the quarter as first being deposited for employment taxes other than the employer share of Social Security tax. Employers can claim the employer share of Social Security tax that was already paid as a credit against other employment taxes for the second quarter and request a refund on a subsequent Form 941 filing if the total payments exceed the total liabilities.

If you have any questions about how the new Paycheck Protection Program Flexibility Act or the CARES Act might effect a deferral or how the deferral can affect your businesses cash flow, please contact your Marcum Tax Advisor.