One of the payroll tax provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer the employer Social Security tax for 2020. The employer Social Security tax is due on employee wages up to the taxable wage base of $137,700 for 2020. This 6.2 percent tax is otherwise deposited with the IRS along with the employer 1.45 percent Medicare tax and the employee payroll tax amounts. Under the CARES Act, the employer could refrain from depositing the employer’s 6.2 percent tax accruing on or after April 1, 2020 through Dec. 31, 2020. The company could instead deposit 50 percent of the deferred amount by Dec. 31, 2021, and deposit the remaining 50 percent deferral by Dec. 31, 2022. This delayed due date amounts to an interest-free loan for employers, providing the employer more liquidity during the pandemic.
A significant number of companies chose to defer these Social Security taxes under this CARES Act provision. The deferred amount is reported on Form 941 for the quarter (or on a Form 941 X for the quarter) on new line 13b. As a note, if an employer separately allowed employee Social Security deferrals, starting in September, these deferrals are also reported on Form 13b but are separately identified on line 24. Far fewer companies allowed employees to defer Social Security taxes, but companies should review line 24 as part of determining the amount of employer Social Security liability that will need to be paid.
As a general rule, if the employer did not incur the tax expense and will not pay the amounts until the end of 2021 and 2022, the employer cannot take a tax deduction until it is deposited in those later taxable years.
Some employers are now considering paying some or all of the deferred tax early for a number of reasons, including a company wanting to reduce liabilities before an acquisition or a company realizing that the 2020 year was not as bad as expected and that the tax deduction for the payment might be welcome in 2020.
The IRS has issued guidance permitting a company to pay the employer’s deferred Social Security tax before the 2021 and 2022 due dates. The payment instructions are provided in IRS FAQ 29 (of the Social Security Deferral FAQs). Interestingly, the payment is not (at least for now) reported on a Form 941 or an amended Form 941. Instead, the IRS provides that the employer can pay by check or credit card or, under the IRS “preferred” approach, can use the Electronic Federal Tax Payment System (EFTPS) website.
For companies that generally file Form 941 for payroll and the EFTPS system to make this payment, the employer is instructed to:
- Select Form 941,
- Select the Year in which the payment was deferred (2020),
- Select the quarter in which the amounts being paid were deferred, and
- Select the marker providing that the payment is being made based on an IRS Notice (even if the IRS has not issued such a notice).
If the company is paying amounts for more than one quarter, the employer needs to report separately for the amounts deferred in a given quarter that are now being paid. Thus, if the employer started deferring in April 2020, continued to defer until September 2020, and is paying the entire amount in December 2020, the company must report the payment of amounts deferred in the second quarter (April – June) on one payment through EFTPS (showing the 2020 year and the 2nd Quarter Form 941). The company must show the payment amounts deferred in the third quarter (July – September) on a separate payment through EFTPS (showing the 2020 year and the 3rd Quarter Form 941).
If a company deferred some 4th quarter (October – December) amounts, and is now paying those deferred amounts later in the same 2020 quarter, the IRS has separate instructions. Under these instructions, because the amounts have not yet been reported as deferred on a Form 941 (or amended Form 941), the employer reports the later deposit of the earlier deferral on the Form 941 for that quarter (it is treated as a deposit for the pay period in which the payment is deposited). The employer then does not report the deferral on the Form 941 for that quarter.
The IRS has stated that these amounts will be matched against the Form 941 (or Form 941 X) reporting the original deferrals and thus the remaining outstanding deferral liability will be reduced by the amounts paid in using the EFTPS.
Employers should keep backup copies of the EFTPS filings in which the deferral amounts are paid. In addition, companies should share copies of these deferral payments with both the company’s tax return preparers and the company’s auditors so both teams are aware of the reduction in the overall liability and the date of payment.
Accounting Method Considerations
A company wanting to pay the deferral back early in order to obtain a 2020 deduction may need to consider accounting method and other issues, depending on the payment timing.
- For cash basis taxpayers, taxpayers generally take the deduction when paid.
- For an accrual basis taxpayer, as taxes are generally a payment liability, deferred Social Security taxes paid within the 2020 calendar year are likely to be tax deductible for the 2020 taxable year.
- Amounts paid after the end of the 2020 calendar year that relate to 2020 Social Security taxes might still be tax deductible in 2020 if the company has a method that supports a tax deduction in 2020 based on the recurring item exception (which generally may allow a 2020 deduction if the amount is paid to the IRS by the earlier of 8 ½ months after the end of the tax year or when the taxpayer timely files its tax return (including extension)). Whether the payment in 2021 can be deducted in 2020 will depend on whether the company already has an appropriate accounting method or can make an accounting method change in time to support such a deduction.
- Taxpayers would also need to consider the impact to capitalized labor costs under a provision such as section 263A when determining the immediate benefit of accelerating the payment of Social Security amounts.