The IRS recently released frequently asked questions (FAQs) with respect to the ability for employers to defer the deposit and payment of the employer’s share of social security taxes pursuant to the Coronavirus, Aid, Relief and Economic Security (CARES) Act, which FAQs can be located here. In the FAQs, among other questions and answers with respect to the payroll tax deferral, the IRS addresses and provides taxpayer favorable clarification on the interaction of the payroll tax deferral with respect to loans that are forgiven under the Payroll Protection Program (PPP).
Payroll Tax Deferral Background
As background, the CARES Act provides employers with the ability to defer paying the employer’s share of social security taxes required to be paid for the period beginning on March 27, 2020 and ending on December 31, 2020. Such deferred social security taxes are required to be paid over the next two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. However, importantly, the CARES Act provides that employers who have PPP loans forgiven do not qualify for this deferral.
As employers began to closely examine the details of this payroll tax deferral and the PPP, employers realized that the PPP loan forgiveness exception to this payroll tax deferral presented a potential timing problem because an employer likely would not know until after several of its normal employer payroll deposit periods have passed if the employer would actually receive a PPP loan and then if the PPP loan is actually forgiven. This potential timing problem raised the question of potential penalty exposure for employers if an employer were to take advantage of such deferral and then find out later that it received forgiveness of a PPP loan. The IRS addresses and provides clarification with respect to this timing issue in FAQ #4.
FAQ #4: Clarification on Interaction of Payroll Tax Deferral and PPP Loan Forgiveness
In FAQ #4, the IRS provides that employers may defer (without penalties) the deposit and payment of the employer's share of social security taxes that otherwise would be required to be made beginning on March 27, 2020, through the date that the lender issues a decision to forgive the loan. Once a decision is received that a PPP loan is forgiven, the employer is no longer eligible for the deferral with respect to the employer’s share of social security taxes due after such date. Notwithstanding that the employer will no longer qualify for social security taxes due after such decision date, the employer still qualifies for the deferral with respect to the amount of the employer’s share of social security taxes that were deferred through the date that the PPP loan is forgiven, which means that half of such deferred amounts will be due on December 31, 2021 and the other half on December 31, 2022.
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