The IRS recently released a second set of draft instructions for Form 941, Employer’s Quarterly Federal Tax Return. The IRS also released the final Form 941, which was revised significantly from the prior form to accommodate the employer social security tax deferral and employer social security tax credits enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the Families First Coronavirus Response Act (“FFCRA”). The final Form 941 is identical to the draft Form 941 released in April. To take full advantage of the employer social security tax deferral, however, some employers must take immediate steps within the next several days and in some cases, no later than today depending upon their pay cycles and when they implemented the deferral.
Critically, the first set of draft instructions indicated in the instructions for new Line 13b that employers cannot defer the employer share of social security taxes that the employer deposited for wages paid in the second quarter. Although Section 2302 of the CARES Act went into effect on March 27, many employers and their payroll processors were not able to update their systems to accommodate the employer social security tax deferral until later in April. (See earlier coverage.) As a result, large employers may have deposited millions of dollars in employer social security tax that could have been deferred until the end of 2021 and 2022 (fifty percent of the total tax deferred must be deposited by December 31 of each year).
The approach taken by the IRS means that any employer social security tax deposited before the deferral was implemented cannot be deferred by the employer. This would deprive many employers of the full cash flow benefit the Congress intended under the CARES Act in a time of unprecedented crisis and lost revenue for many businesses. However, the second set of draft instructions includes a revised tip that an employer may treat prior deposits during the quarter as first being deposited for “employment taxes other than the employer share of social security tax.”
To take advantage of this, employers who have deposited employer social security tax during the second quarter must reduce their deposits of other employment taxes (federal income tax withholding, employee social security tax, and employee and employer shares of Medicare taxes) by the amount of employer social security tax deposited. Given that only four days remain in the quarter, employers who do not have payroll cycles ending in the next several days may be unable to reduce their deposits to account for the earlier deposited employer social security tax. For example, an employer who deposited employer social security taxes earlier in the second quarter who issues paychecks today, should immediately contact their payroll processor to attempt to reduce their deposit of employment taxes that is due on Monday. Similarly, employers who issue paychecks on the last day of the month, should contact their payroll processor immediately to arrange to reduce the employment tax deposits associated with that pay cycle.
It is unclear whether an employer who wishes to defer earlier deposits of employer social security taxes but does not have remaining employment tax deposits for the second quarter will have a means to achieve its desired result. It might be possible to transfer a deposit from the employer’s second quarter Form 941 account to its third quarter Form 941 account before filing its Form 941 for the second quarter. Employers wishing to pursue this option should discuss the risks and potential issues with their payroll tax counsel.