CARES Act Payroll Tax Deferral – Revised Form 941 Includes Helpful Guidance for Employers

Ballard Spahr LLP

Ballard Spahr LLP

The IRS released a final version of Form 941 (the employment tax return to be used by employers for the second quarter for 2020) and a revised set of accompanying Instructions. The Form and particularly the Instructions (available here) provide additional information to employers about claiming COVID-19-related employment tax benefits available under the FFCRA and CARES Act.

Certain changes to the Instructions are potentially very helpful to employers that made payments of payroll taxes but now want to take advantage of the CARES Act deferral provisions applicable to a portion of employer FICA taxes.

FICA taxes are imposed on both employers and employees on employees’ wages at a rate of 6.2 percent for the Social Security Tax and 1.45 percent for the Medicare Tax. The CARES Act allows an employer to defer payments of the employer portion of the Social Security Tax. The deferral applies to deposits and payments of the employer's share of Social Security tax that otherwise would be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. 50 percent of the deferred taxes must be paid by December 31, 2021, and the other 50 percent must be paid by December 31, 2022.

Originally, the CARES Act provided that employers with forgiven PPP Loans would not be eligible for this deferral, but that restriction was lifted by the PPP Flexibility Act, thereby expanding the wages that qualify for the deferral.

A question left unanswered by the CARES Act was whether employers who made payroll tax deposits before learning they were eligible for the deferral or before deciding to defer nonetheless may take advantage of the deferral provisions. The initial answer—as set forth in the first set of Instructions for the revised Form 941—was no. Because the payroll deferral was only a deferral of deposit obligations and not a change to the amount of an employer’s deposit obligations, the original Instructions provided that nothing could be done with respect to already-deposited FICA taxes.

The revised Instructions, however, provide that when determining whether any amount of the employer’s share of Social Security tax was already deposited for purposes of the deferral, an employer can consider prior deposits during the quarter as first being deposited for employment taxes other than the employer’s share of Social Security tax. Therefore, although Instructions do not constitute formal guidance and are not binding on the IRS, this statement would indicate that employers who already deposited Social Security taxes can nonetheless take advantage of the deferral provisions by designating prior deposits as deposits of Medicare taxes or as federal income tax deposits, rather than as Social Security tax deposits, when filing their second quarter 2020 employment tax returns. Such employers could therefore reduce future payments of those taxes and obtain the benefits of the deferral provision.

Unfortunately, this change came after most employers filed their 941s for the first quarter of 2020, due April 30, 2020, which would have included otherwise qualifying deposits made between March 27, 2020, and March 31, 2020. Employers may consider whether they could file amended returns for the first quarter to retroactively treat first quarter deposits as deposits of taxes other than the employer’s share of Social Security taxes, thereby benefitting from the deferral for that period as well.

As noted above, the Instructions are not binding on the IRS, and the informal guidance in this area changes frequently. However, this change in the IRS position could provide welcome relief to many employers and free up additional cash for other uses during the deferral period. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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