IRS Clarifies Interaction of Payroll Tax Deferral with PPP Loan Forgiveness Under CARES Act

In our client alert published on April 1, we summarized provisions of the CARES Act that defer the obligation of employers and self-employed individuals to pay the employer share of the Social Security tax (imposed at a rate of 6.2 percent, up to a maximum wage base of $137,700 per employee for 2020) otherwise due with respect to wages paid from the date of the CARES Act through the end of 2020.  As noted in that client alert, taxpayers who take covered loans under the Paycheck Protection Program (PPP) set forth in the CARES Act and whose loans are forgiven under the terms of the CARES Act are not eligible for the deferral described above.

On April 10, the Internal Revenue Service (IRS) published responses to frequently asked questions with respect to the payroll tax deferral provisions of the CARES Act, available here.

In the responses, the IRS helpfully clarified that employers who receive a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan in the CARES Act, without incurring failure to deposit and failure to pay penalties. (Note that such deferred taxes will continue to be owed prior to the deferred dates of December 31, 2021 (the first 50 percent) and December 31, 2022 (the other 50 percent), even if a PPP loan is obtained and forgiven subsequently.)

Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date.

The responses also confirm that employers are not required to make a special election to be able to defer deposits and payments of the affected employment taxes. They further clarify aspects of the interaction of the payroll tax deferral provisions with the tax credits available for paid leave under the Families First Coronavirus Relief Act and the employee retention tax credit available under the CARES Act.