As of June 3, 2020, the IRS recently published its modified draft Form 941 instructions (Employer Quarterly Federal Payroll Tax Return) clarifying the CARES Act's newly enacted tax benefits (i.e. "Qualified Sick & Family Leave Credits", "Employee Retention Credits", "Payroll Tax Deferral") available to U.S. taxpayers as support during the COVID-19 pandemic.
Although the IRS cautions to not file nor rely on draft forms, instructions, and publications for filing, the IRS does not release draft forms until it believes it has incorporated all changes prior to finalization, subject to unexpected events occurring.
In general, pertaining to payroll tax deferral benefits, the CARES Act limits the deferral to the employer's share of Social Security tax, and prevents deferral of other taxes reported on Form 941 -- i.e. federal income tax withheld from employee wages, taxable Medicare wages, or employee(s)' share of Social Security tax. However, 50% of the deferred employer's share of social security must be deposited by December 31, 2021, and the remaining by December 31, 2022.
"[D]eferral applies before any of the nonrefundable credits claimed on line 11a [Qualified small business payroll tax credit for increasing research activities], 11b [Nonrefundable portion of credit for qualified sick and family leave wages], or 11c [Nonrefundable portion of employee retention credit], but the deferral also doesn't reduce the amount of the employer share of social security tax used to figure those nonrefundable credits."
As such, the amount of employer Social Security tax eligible for deferral by the taxpayer is the amount before any claimed nonrefundable credits (i.e. R&D payroll offset credits) are applied as mentioned above. In general, the employer’s share of Social Security tax is 50% of the total Social Security tax reported on Form 941.
Therefore, the recent IRS draft Form 941 instructions provide the taxpayer may be allowed to defer deposit and payment of the employer's portion of Social Security tax due (prior to any nonrefundable credit claims & adjustments being made) and claim the R&D credit against payroll tax simultaneously in the applicable quarter's 941 tax filing.
However, the IRS draft instructions also caveats limitations on Social Security taxes already deposited or paid for the quarter as noted below.
"[T]he deferred amount of the employer share of social security tax is a deferral of deposits and payments, not a deferral of liability. You won't receive a refund or credit of 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, you can consider prior deposits during the quarter as first being deposited for employment taxes other than the employer share of social security tax." See IRS Instructions for Form 941 (Rev. 4-2020), pg.14, (Draft as of June 3, 2020).
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Note, the R&D tax credit payroll offset election must be made on the originally filed U.S. federal tax return, Form 6765 (i.e. 7/15, 9/15, 10/15 due dates), if inquiring to utilize both tax benefits as discussed above.
If you have questions on what these changes mean for your business, and would like assistance in claiming these available tax benefits and immediate cash saving opportunities (e.g. R&D tax credits), please contact AndreTaxCo today!