The COVID-19 pandemic allowed for a lot of tax leeway in 2020. But now it is time for those who deferred payroll taxes to pay up. If 2020 was a blur for you, don’t worry. We’ll start with a recap.
A little refresher: The CARES Act, is a $2.2 trillion economic stimulus bill that was signed into law in March 2020 to help combat economic fallout of the COVID-19 pandemic. Why are we telling you this? Well, this relates directly to tax deferrals:
- The CARES Act allowed employers to defer payment of the employer’s share of Social Security tax.
- Following the CARES Act, in August 2020, President Trump also signed a Presidential Memorandum, which allowed employers to defer withholding and payment of the employee’s share of Social Security taxes on certain wages paid in the 2020 calendar year IF the employee earned less than $104,000 annually—or less than $4,000 in wages every two weeks.
When are deferred taxes due?
Deadline to pay deferred employer payroll taxes:
- Half by December 31, 2021
- The remaining half by December 31, 2022
Deadline to pay deferred employee payroll taxes:
- December 31, 2021
Deferred employer payroll taxes
If you deferred the employer taxes in 2020, you must:
- Repay 50% of the deferred taxes by December 31, 2021, and
- Pay the remaining 50% of the deferred employer by December 31, 2022 (so you’ve got some time for this portion).
Deferred employee payroll taxes
Repayment of the employee’s portion of 2020 deferred Social Security taxes started January 1, 2021 and will continue through December 31, 2021—when the entire amount is due.
Employers can collect the deferred tax by debiting it from the employee’s paycheck. The withholding schedule (or any other repayment arrangement) should be communicated to the employee in advance so that they can plan their finances. Details of the collection schedule should be stored with the employer’s payroll records. Additionally, the withholding needs to be documented on the employee’s pay stub—so be sure to connect with your payroll provider.
If an employee quits or is terminated before their deferred tax is paid, you’ll need to work with your former employee to arrange collection of those taxes. Ultimately, the employer is responsible for collecting and making those payments to the IRS.
How to pay
There are a number of ways to repay your deferred taxes to the IRS.
Deferral payments can go through the Electronic Federal Tax Payment System (EFTPS), which is the best option for businesses or large payments. Enrollment for this process is required, but once that is complete, employers can make an electronic payment, and monitor future tax payments online.
Note that payments using EFTPS or the IRS’s voice response system must be scheduled by 8 p.m. ET the day before the due date to be received timely by the IRS. To make the deferred payment using EFTPS, select deferral payment and change the date to the applicable tax period for the payment. To make the payment via voice response, call 1-800-555-3453 and follow the prompts. The funds will move out of your banking account on the date you select for settlement. Alternatives to EFTPS include paying by credit card, debit card, money order, or check.
These payments must be separate from other tax payments to ensure they applied to the deferred payroll tax balance. IRS systems won’t recognize the payment if it is combined with other tax payments or sent as a regular tax deposit.
What happens if you do not pay on time?
The IRS provided many ways for people to get their deferred payments in. If you miss all those windows of opportunity, penalties and interest will apply to any unpaid balance.
For deferred employee taxes, ultimately, the employer is responsible for paying these taxes even if they haven’t collected the taxes from their employee yet. For this reason, employers should make the tax payment by December 31, 2021 even if they haven’t collected all of the taxes from their employee.