IRS Updates FAQs on CARES Act Employee Retention Credits and Payroll Tax Deferrals

The IRS recently updated its frequently asked questions (FAQs) on the Employee Retention Credit (ERC) and payroll tax deferrals under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). These provisions encourage businesses to keep employees on their payroll during the COVID-19 global pandemic. Although the FAQs cannot be relied upon as legal authority, they indicate the IRS’s thinking.


Borrowers With Forgiven PPP Loans Can Defer Payroll Tax Deposits

Section 2302 of the CARES Act provides that, through December 31, 2020, employers may defer the deposit and payment of the employer's portion of Social Security taxes and certain railroad retirement taxes. Half of the deferred amount is due on December 31, 2021, and the other half is due on December 31, 2022.

On June 26, the IRS updated FAQ #4 on CARES Act payroll tax deferrals, confirming that an employer who has a Paycheck Protection Program (PPP) loan forgiven under the CARES Act is entitled to defer payment and deposit of the employer’s share of Social Security tax. The update to FAQ #4 follows the enactment of the Paycheck Protection Program Flexibility Act (P.L. 116-142), which eliminated the CARES Act provision that had prevented an employer from deferring the deposit and payment of its share of Social Security taxes after its PPP loan was forgiven.

BDO Insights:

An employer that receives a PPP loan can defer payment and deposit of the employer’s share of Social Security tax not only while the PPP loan is outstanding, but also after the loan is forgiven.

The CARES Act payroll tax deferral provision essentially gives employers a two-year, interest-free loan from the federal government of approximately 6.2% of an employer’s payroll (up to $137,700 per employee, which is the 2020 Social Security wage base cap). Employers are not required to apply for or take any other steps to qualify for this “loan.” This payroll tax deposit loan is available regardless of whether the employer applied for a PPP loan or Main Street Lending Program loan.

Employee Retention Credit Updates

On June 26, the IRS updated several ERC FAQs. The ERC is a refundable tax credit equal to 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. Each payroll period, employers may subtract the ERC from the employer’s portion of payroll tax deposits and retain (rather than remit) that amount. But if the employer does not have sufficient payroll taxes to fund the ERC, the employer can apply for a rapid refund of the ERC using IRS Form 7200.

BDO Insights:

Although the credit is determined quarterly, only $10,000 of wages per employee can be counted for all calendar quarters (i.e., the credit is currently capped at $5,000 per employee).

Several proposals are pending in Congress that would expand the amount, scope and duration of the ERC. Further action on those proposals is expected between July 20 and early August.

We understand that the IRS generally sends employers a paper check within 13 days after processing the Form 7200. But due to the number of refund requests being processed by the IRS, it may take approximately 30 days from the date the Form 7200 was submitted to receive the refund check. The IRS has set up a special unit to solely handle processing these advance refund requests.


Below is a summary of the changes made by the updated ERC FAQs: