Section 2302 of the CARES Act: Delay of Payment of Employment Payroll Taxes - An Update

The CARES Act legislated several amendments to the tax code in an effort to help businesses maintain higher levels of liquidity during the COVID-19 pandemic. One of these amendments, set out in Section 2302 of the Act, allows an employer to delay the payment of the employer’s share of social security taxes. This article is an update to our previously issued law alert, “Tax Provisions in the CARES Act.”

Delay of Payment of Employer Payroll Taxes

Under this provision, employers of any size are allowed to delay the deposit and payment of their share of social security taxes which would have been due between March 27, 2020 and January 1, 2021. Specifically, 50% of the deferred employment taxes will not be due until December 31, 2021, with the remaining 50% not due until December 31, 2022. This provision similarly applies to self-employed individuals who would otherwise be required to pay self-employment taxes during the covered period.

Can an Employer Utilizing the Loan Forgiveness Program Also Defer Payroll Taxes Under This Provision?

Confusion about whether or not an employer can take advantage of the payroll tax deferral option under Section 2302 if that employer has also applied for a loan under the Paycheck Protection Program (PPP) spurred the IRS to provide some guidance on that point. The language of the CARES Act stated that the option to delay the employer’s share of social security taxes provided for under Section 2302 of the Act “shall not apply to any taxpayer if such taxpayer has had indebtedness forgiven under the [PPP loan forgiveness program] or under Section 1109 of this Act[1].”  Initially, most interpreted these terms broadly to mean that anyone who obtained a loan through these programs was not eligible to participate in the payroll tax deferral option. However, the Internal Revenue Service recently issued guidance stating that any employer can take advantage of the payroll tax deferral option, with some important limits.

It is now clear that an employer that has applied for and obtained a PPP loan may participate in the payroll tax deferral option, but only up to the point in time that the employer is notified by its PPP lender that the employer’s loan has been forgiven. Once the employer receives notification that its PPP loan has been approved for forgiveness, that employer may not continue to defer any additional taxes through the payroll tax deferral option. To the extent that an employer had already deferred a portion of payroll taxes under the payroll tax deferral option prior to such notification, however, those taxes will remain deferred and will become due in accordance with the terms of the CARES Act payroll tax deferral option, i.e., any deferred taxes would be due December 31, 2021 and December 31, 2022.

Presumably, the employer who obtains only partial loan forgiveness on the employer’s PPP loan would still be precluded from deferring any additional taxes under the payroll tax deferral option, but this was not specifically addressed in the recent guidance. However, additional guidance from the Secretary of the Treasury may be forthcoming related to this section, and this may change the details of how the rules apply.

What is the Appropriate Method or Procedure to Obtain the Deferral?

The IRS will be issuing a revised Form 941, Employer’s Quarterly Federal Tax Return, which should be used to reflect the deferred payroll tax election, and asks that employers wait for this revised form and related guidance to file.

[1] The CARES Act references Section 1109, but it seems likely that the intent was to reference Section 1110 which relates to EIDL Loans, because Section 1109, titled United States Program Management Authority sets out guidelines for lenders for implementation of the PPP loan.