In response to the pandemic, President Joe Biden signed the American Rescue Plan Act into law. It was enacted on March 11, 2020, and one of the provisions gave employers the right to postpone payment of certain payroll taxes until 2021 and 2022.
Read on to learn more about what this meant for employers and what to do if you elected to defer payroll taxes and are unable to repay what you owe by the deadline.
What are Deferred Payroll Taxes?
Payroll Deferral Under the CARES Act
Under Section 2302 of the CARES Act, employers were allowed to defer their share of Social Security tax payments, equivalent to 6.2 percent of wages, from March 27, 2020, to December 31, 2020. However, the payroll deferral did not apply to the employee portion of Social Security tax (6.2 percent) or Medicare taxes (2.9 percent of wages).
If you elected to defer payments, half of the amount would be due on December 31, 2021, and the remaining portion would be due on December 31, 2022.
Who Is Eligible for Deferred Payroll Taxes?
Employers and government entities were eligible for the employer payroll tax deferral. Self-employed individuals could also opt to defer payroll taxes.
Can Employees Opt-Out?
The decision to defer payroll taxes was at the employer’s discretion, and they had the ability to opt out.
How to Defer Payroll Taxes as an Employer
What Forms Are You Required to File?
Employers who elected to defer payroll taxes were required to File IRS Form 941 (Employer’s Quarterly Federal Tax Return) and input the deferred amount of Social Security taxes on the form. No special elections were required.
Quick note: IRS Form 941 and the applicable instructions weren’t updated for the first quarter of 2020. Consequently, a discrepancy between the amount reported and the payments would exist if you deferred payroll taxes. The IRS has taken steps to resolve the variances by sending out written notices to affected employers that explain how to notify them that the difference was a result of the deferral permitted by Section 2302 of the CARES Act.
When is the Deadline to Defer Payroll Taxes?
Payroll tax deferrals were permitted from March 27, 2020, through December 31, 2020.
Repayment Of Deferred Taxes
Will You Have to Pay Back Deferred Payroll Taxes?
Yes, employers are liable for the repayment of deferred taxes. The first payment was due on December 31, 2021, for half of the amount deferred. The remaining balance is due on December 31, 2022, and can be remitted through the Electronic Federal Tax Payment System or by debit card, credit card, check or money order.
What Are the Penalties for Late Payment of Deferred Payroll Taxes?
IRS COVID Tax Tip 2021-32 states that late payments for the deferred Social Security taxes will result in penalties. You will also accrue interest on the balance that remains unpaid.
Here’s a breakdown of how the failure to deposit penalty is assessed:
- Deposits that are 1 to 5 calendar days past due: 2 percent of the unpaid deposit
- Deposits that are 6 to 15 calendar days past due: 5 percent of the unpaid deposit
- Deposits that are more than 15 calendar days past due: 10 percent of the unpaid deposit
If you receive a notice in the mail from the IRS notifying you of the delinquency or demanding immediate payments, the penalty increases to 15 percent of the unpaid deposit.
How To Get Help To Avoid Penalties
Despite efforts by the federal government to help small businesses get back on track, many haven’t yet recovered from COVID-19 and the severe financial damage it caused. Perhaps you’re a small business owner that can relate. And electing to defer Social Security taxes may have seemed like a sound idea at the time to provide much-needed relief, but now you’re unsure how you’ll repay what’s owed by the deadline.
It’s a tough decision to be in, but you’re not completely out of luck. Consider reaching out to a tax relief expert to get assistance with deferred payroll tax issues and failure-to-deposit penalties.
