Due to the pandemic and the desire of the federal government to keep more money in the hands of businesses and individuals, there were certain tax deferral options available in 2020. But 2021 is the time for reckoning. How to handle payments of deferred amounts depends on what was deferred.
Employer’s Social Security taxes
The CARES Act allowed employers to defer payment of their share of Social Security taxes (part of FICA) from March 27, 2020, through December 31, 2020. This option to defer the deposit and payment of these taxes was figured before the credits for mandatory paid sick leave and paid family leave in 2020 as well as the employee retention credit in 2020.
Deposits of the employer’s share of Social Security tax that would otherwise be required to be made during the payroll deferral period may be deferred until the “applicable date.” The applicable date is 50% of the deferred amount by December 31, 2021, and 50% by December 31, 2022; deferred amounts must be deposited by these dates to avoid a failure to deposit penalty. If an employer pays any amount before the applicable dates, any such payment is first applied to reduce the employer’s liability for an amount due on December 31, 2021, and then to the amount due on December 31, 2022.
The IRS gives these examples:
Example 1: If an employer was eligible to defer $20,000 for the payroll tax deferral period, paid $0 of the $20,000, and deferred $20,000 for the payroll tax deferral period, the employer needs to pay $10,000 no later than December 31, 2021, and the other $10,000 on December 31, 2022.
|Example 2: If an employer was eligible to defer $20,000 for the payroll tax deferral period, but paid $15,000 of the $20,000, and deferred $5,000, the employer does not need to pay any additional amount by December 31, 2021, since 50% of the eligible deferred amount (or $10,000) has already been paid and is first applied against the employer’s amount due on December 31, 2021. The employer must pay the remaining $5,000 by December 31, 2022.|
The IRS has FAQs on the deferral of an employer’s Social Security taxes.
Note: The Electronic Federal Tax Payment System (EFTPS.gov) is creating a new option to select “deferral payment.” It is unknown when this will be available.
Employee’s Social Security taxes
The IRS allowed employers to defer the employee share of Social Security taxes from September 1, 2020, through December 31, 2020. This deferral applied only for employees earning no more than $4,000 in wages every 2 weeks. While not many private sector employers opted for this deferral, some did and now repayment time is at hand.
The employer must now withhold for the deferred amount. If the employee no longer works for the company, the employer is responsible for repayment of the entire deferred amount.
Repayment of the employee’s portion of the deferral started January 1, 2021, and will continue through December 31, 2021. Payments made by January 3, 2022, will be timely because December 31, 2021, is a holiday.
The employer should send repayments to the Treasury as they are collected. If the employer does not repay the deferred portion on time, penalties and interest will apply to any unpaid balance.
Portion of self-employment tax
Self-employed individuals were able to defer one half of the Social Security tax portion of self-employment tax for the same period applicable to the employer’s deferral period. They were able to use any reasonable method to allocate net earnings for the year, which is the amount on which self-employment tax was imposed. For example, a self-employed individual could allocate 22.5% of the individual's annual earnings from self-employment to the period from January 1, 2020, through March 26, 2020, and 77.5% of the individual’s annual earnings to the period from March 27, 2020, through December 31, 2020. The deferral amount was figured in Part III of Schedule SE (Form 1040 or 1040-SR) for 2020.
Like employers, 50% of the deferred amount must be paid by December 31, 2021, and the other 50% by December 31, 2022. Because self-employed individuals don’t deposit their self-employment tax, they must take the deferred amount into account for estimated tax purposes.
The instructions to Form 1040-ES, Estimated Tax for Individuals, do not include any reference to this deferral. It would seem that the 50% due for 2021 should probably be included in the third installment of estimated tax because the fourth installment isn’t due until after the December 31, 2021, deadline for paying the 50% amount. Of course, an additional estimated tax payment may be made at any time (e.g., December 31, 2021) through EFPTS.gov. Check to see whether EFTPS creates a deferral payment option like the one being created for employers.
Employers and self-employed individuals may need to adjust their budgets to account for repayment of deferred taxes. Work with a CPA or other tax adviser to ensure that the correct repayments are made on a timely basis.