UPDATE: President Trump signed the bill into law on Friday afternoon.
Earlier this afternoon, the House passed by voice vote the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the third Coronavirus-related piece of legislation, which was passed by the Senate on Wednesday with a 96-0 vote. At $2 trillion, the CARES Act is the largest stimulus package in U.S. history and is headed to the White House for President Trump’s signature later today.
In our previous article, we provided a Client Alert summarizing the tax-related provisions in the CARES Act. Our next two articles will highlight two provisions available to qualifying employers as they navigate this challenging time. Today, we focus on Section 2302, which permits employers to defer deposits of the employer share of social security taxes. Given that it is a near certainty that the President will sign the Act before Monday, employers may seek to cancel payroll tax deposits initiated for wages paid today and initiate a same-day wire transfer deposit on Monday of the payroll deposits less employer social security tax. The deferral provision applies only to the employer’s share of social security tax. It does not apply to the employer’s Medicare taxes nor to the employee’s share of social security or Medicare taxes.
On Tuesday, we will highlight Section 2301, which provides an employee retention credit to eligible private employers equal to 50 percent of “qualified wages” that is applied to the employer portion of social security taxes.
Delay of Employer Payroll Tax Deposits
Section 2302 of the CARES Act permits employers to delay the required deposits of the employer share of social security tax or the railroad retirement tax up to the amount of tax equivalent to the social security tax. In general, employers are required to deposit 6.2% of the amount of wages up to the social security wage base ($137,700 for 2020) relatively quickly after making a wage payment. This amount is in addition to any federal income tax withholding, the employer share of Medicare taxes, and the employee share of social security and Medicare taxes. The timing varies from once per month for very small employers to twice weekly. In addition, large employers are often “next-day depositors,” because the accumulation of payroll taxes exceeding $100,000 on any day requires the electronic deposit of those taxes, so that they satisfy the tax obligation by the close of the next business day.
Under Section 2302 of the CARES Act, the employer may significantly defer the deposit of the employer share of social security taxes (but not Medicare taxes). Specifically, all employer social security taxes otherwise required to be deposited between the date of enactment and December 31, 2020, are not required to be deposited on the normal deposit schedule. Instead, half of such taxes would be required to be deposited by December 31, 2021. The remaining deferred social security taxes would be required to be deposited by December 31, 2022.
The IRS is expected to revise Form 941, Employer’s Quarterly Federal Tax Return, to track the employer’s decision to defer tax deposits. Employers must be mindful that wage payments late in 2020 might trigger a deposit requirement based on the employer’s usual deposit schedule, because the deferral is not triggered by the liability date (e.g., a payroll date on December 31) but instead by the deposit deadline (e.g., January 2, 2021). In other words, the deadline for depositing the employer share of social security tax for wage payments made in late December 2020 is not deferred if the deposit deadline occurs in early 2021.
It is important to note that Section 2302(a)(3) provides that this deferral provision will not apply to the employer if it has indebtedness forgiven under section 1106 with respect to a loan under paragraph 36 of section 7(a) of the Small Business Act, as amended by section 1102, or indebtedness forgiven under section 1109.