IRS Clarifies Aspects of Deferring Employer Social Security Tax

Employers choosing to defer depositing their portion of Social Security tax under coronavirus-relief legislation are to receive deposit reminder notices from the Internal Revenue Service in advance of the delayed due dates, IRS representatives said Aug. 6.

Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows employers to defer deposits of the employer portion of Social Security tax otherwise due from March 27 to Dec. 31, 2020, or due after that period based on wages paid during the period.

With respect to the second, third, and fourth quarters of 2020, half of an employer’s portion of Social Security tax liability for the quarter must be deposited by Dec. 31, 2021, with the other half deposited by Dec. 31, 2022. Similarly, half of an employer’s portion of Social Security tax liability with respect to the span from March 27 to March 31 within the first quarter of 2020 is due Dec. 31, 2021, with the other half due Dec. 31, 2022.

The reminder notices are to be sent by the IRS one to two months in advance of the deferred deposit due dates in 2021 and 2022, IRS representatives said during the agency’s monthly payroll industry teleconference, during which the IRS elaborated upon its July 30 updates to its set of frequently asked questions and answers on deferring the employer portion of Social Security tax. The IRS on July 30 added 20 questions and associated answers to this set, for a total of 31 frequently asked questions and answers regarding deferrals of the employer portion of Social Security tax.

The Electronic Federal Tax Payment System is to be the preferred method for paying the deferred amounts of the employer portion of Social Security tax. As the deferrals are with regard to deposits but not liability, an employer that deferred an amount still would need to include that amount when determining if it has accumulated at least $100,000 of employment tax liability and therefore would be required to make a next-day deposit, the IRS representatives said.

An employer’s determination of whether it is a semiweekly depositor or monthly depositor, for which semiweekly depositor status applies if more than $50,000 in employment tax liability required to be reported on Form 941 is accumulated by the employer during the applicable look-back period, likewise would include the employer portion of Social Security tax regardless of whether the employer defers deposits of its portion.

Employment tax liabilities accumulated during the deferral period from March 27 to Dec. 31, 2020, will affect two look-back periods: the calendar year 2021 look-back period from July 1, 2019, to June 30, 2020, and the calendar year 2022 look-back period from July 1, 2020, to June 30, 2021. As the requirement to make a next-day deposit can cause a monthly depositor to become a semiweekly depositor for the remainder of the year when the next-day deposit needed to occur and for the following year, this further emphasizes the importance of ensuring that the employer portion of Social Security tax is included in determining whether a next-day deposit needs to occur.

As the revised Form 941 to be used starting with the second quarter of 2020 did not include lines for reporting first-quarter data on deferring the employer portion of Social Security tax (unlike the revised Form 941’s new lines for reporting employee retention credit data applicable to the first quarter), an employer that deferred an amount of its portion of Social Security tax with respect to the period from March 27 to March 31 is to have a discrepancy between its reported liability for the first quarter and its deposits. An employer with this discrepancy is to receive a notice from the IRS specifying the amount of the discrepancy and providing instructions on how the employer can communicate to the IRS that the discrepancy does not reflect late payment and instead resulted from proper deferral, the IRS representatives said.

Household employers that file Schedule H with their individual income tax return have the ability to defer the employer portion of Social Security tax, the IRS representatives said.

While deferred amounts of the employer portion of Social Security tax are to be reflected as credits on tax transcripts maintained by the IRS, the deferrals are not actually to be functionally treated as credits, the IRS representatives said.

Limited Continued Use of Previous 941, 941-X

While the revised Form 941 released June 19 generally must be used starting with the second quarter of 2020, there still is a limited circumstance when employers can use the original 2020 Form 941 for quarters of this year other than the first, IRS representatives said. During the second, third, or fourth quarter of 2020, if an employer does not engage in any activity that would result in it needing to report data for any of the 18 new lines incorporated into Form 941 pertaining to coronavirus-related employment tax relief, it can use the original 2020 Form 941 for that quarter, the representatives said.

Similarly, although Form 941-X is to be updated to reflect the revised Form 941, with a draft of the revised Form 941-X released July 27, an employer that files a Form 941-X for the second, third, or fourth quarters of 2020 to make adjustments to lines other than those with regard to coronavirus-related employment tax relief can use the version of Form 941-X released in April 2017, which remains the most recently released finalized version, to perform those adjustments, the representatives said.

However, because of considerations of process standardization and electronic programming, payroll professionals likely will determine that it would be more efficient, with regard to filing for employers whose activities did not necessitate reporting of coronavirus-related employment tax relief data, to nonetheless use the revised Form 941 and revised Form 941-X for reporting data for the second, third, and fourth quarters of 2020.