The IRS has recently published a new draft version of Form 941—Employer’s Quarterly Federal Tax Return—and accompanying instructions, which provides additional clarity regarding the newly passed payroll tax deferral provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The instructions provide insight on the operation of the payroll tax deferral in conjunction with certain pre-existing benefits, such as the R&D credit against payroll tax for qualified small businesses.
The new Form 941 and corresponding instructions will be used beginning with filings for Q2 2020—due by July 31, 2020—and include the following changes.
The CARES Act allows employers to defer the deposit and payment of the employer share of Social Security tax that would otherwise be due on or after March 27, 2020, and before January 1, 2021.
Generally, the employer’s share of Social Security tax is half of the total Social Security tax reported on Form 941.
The CARES Act limits the deferral to the employer share of Social Security tax, and thus prevents deferral of other taxes reported on Form 941, such as federal income tax withheld from employee wages, taxable Medicare wages, or the employee share of Social Security tax. In order for deferred deposits of the employer’s share of Social Security to be treated as timely, 50% of the deferred amount must be deposited by December 31, 2021, and the remaining amount by December 31, 2022.
The amount of employer Social Security tax eligible for deferral is the amount before any claimed nonrefundable credits are applied. This includes the R&D credit to offset payroll taxes and any nonrefundable portions of the qualified sick and family leave wages and employee retention credits. The deferral doesn’t reduce the amount of the employer’s share of Social Security tax that factors into the calculation of these other credits.
The deferral and R&D credit against payroll tax are based on the employer portion of Social Security tax. The taxpayer is allowed to simultaneously defer deposit and payment of the amount of tax due as well as claim a R&D credit against payroll tax in the current quarter against this amount of tax liability.
It’s important to note that a company isn’t able to defer any amount of the employer share of Social Security tax already deposited or paid for the quarter. However, in determining whether any amount of the employer share of Social Security tax was already deposited for this purpose, the company can consider prior deposits during the quarter as first being deposited for employment taxes other than the employer share of Social Security tax.
Taxpayers may apply the current benefit of the R&D credit against payroll tax and defer the employer portion of Social Security tax to 2021 and 2022.
Assume a taxpayer reports Social Security taxes of $100—$50 of which is the employer’s share, and $50, the employee’s share. They also report $40 in Medicare and employee income taxes, bringing the total tax of $140. Assume they have an R&D credit of $30. Prior to the CARES Act, the taxpayer would pay the full $140, less the credit of $30 against the employer’s share of Social Security tax, for a total of $110 paid in the current quarter. The net result of this credit is $20 employer Social Security tax paid.
Assume the same facts, except that the taxpayer can now elect to defer the $50 of employer’s share of Social Security tax as a result of the CARES Act. The total tax to be deposited and paid is $90, less the $30 in R&D credit claimed against the incurred, but not deposited, employer’s share of Social Security tax for total tax paid of $60 in the current quarter—versus the full $110 required in the above example.
The remaining $50 of the employer’s share of Social Security tax-deferred is split between payments that aren’t due until 2021 and 2022. In the long-term, the net amount paid for employer Social Security tax remains $20; but in the short-term, the taxpayer benefits both from the payroll credit refund of $30 and the deferral of the full amount of $50 to the later due date.
If you have questions on what these changes mean for you or your organizations and would like assistance, please contact your Moss Adams professional.