As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, businesses could defer their employer portion of payroll taxes from 2020 until 2021 and 2022. Over 1,026,282 employers took advantage of this deferral during the economic burden caused by COVID-19.
President Joe Biden extended the payroll tax deferral as part of the American Rescue Plan Act. The payroll tax deferral has a lot of rules, deadlines, and provisions that businesses need to be aware of to avoid any penalties.
We’ll walk you through what you need to know to comply with the payroll tax deferral to ensure you’re in good standing with the CARES Act and the IRS.
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Table of Contents
What is the Payroll Tax Deferral?
The employer payroll tax deferral provision of the CARES Act allowed all businesses to defer the employer portion of Social Security taxes (6.2% of wages) for all employee wages paid from March 27, 2020, to December 31, 2020. This deferral was in addition to other credits granted in the Families First Coronavirus Response Act (FFCRA).
The deferral didn’t require any special election or direct effect from COVID-19. It was specifically for the Social Security tax responsibility of the employer. Employers could not defer Medicare taxes (2.9%) or the employee’s portion of Social Security taxes.
What Types of Employers Qualify for the Payroll Tax Deferral
The government allows all businesses to qualify, including:
- Government agencies
- Exempt organizations
- For-profit enterprises
This means that the payroll tax deferral is also available to businesses that are utilizing the:
- Families First Coronavirus Response Act (FFCRA)
- Employee Retention Credit
- Paycheck Protection Program
By leveraging these programs and credits, businesses can maximize how they save on tax liabilities. Keeping these all straight and compliant can be challenging. We recommend consulting with tax experts to ensure your business doesn’t incur penalties.
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Related Link: IRC Section 174: Get Lower Tax Bill for Inventors
Is Payroll Tax Deferral All or Nothing?
No. Employers do not have to defer all or nothing of their portion of the tax liability. They can pay a portion and defer a portion. The program is meant to be flexible to fit the needs of the business or organization. Deposits can be paid throughout the year and not just by the deadlines to suit the needs of the business.
When are Employers Expected to Pay Their Deferred Taxes?
Employers were expected to make two payments:
- At least 50% of the deferred taxes by December 31, 2021
- The remaining balance of deferred Social Security taxes by December 31, 2022
To report the deferred taxes, employers need to use Form 941 for the period when the Social Security taxes would have normally been deposited.
How to Pay Your Payroll Tax Deferral Deposit
The IRS recommends using one of the following methods for paying any portion of your deferred Social Security taxes:
- Electronic Federal Tax Payment System (EFTPS)
- Credit or Debit Card
- Check or Money Order
When using the EFTPS payment method, the employer will need to select the correct employment tax return and the calendar quarter that the payment is related to on Form 941.
Failing to Deposit Deferred Taxes
The IRS will issue a failure to deposit taxes penalty on the entire deferred amount from the original due date if any portion of the deferred taxes is not deposited by the applicable due dates. Your business will need to pay the remainder of your deferred taxes by December 31, 2022.
What is the Penalty for Failing to Pay the Payroll Tax Deferral Deposits?
The penalty for failing to pay the deferred taxes is 10% of the entire deferred amount. If the IRS issues a notice, the penalty could increase to 15% if payment isn’t made within ten days. This steep penalty should not be ignored, and employers should plan accordingly for the deposit due dates.
What’s the Difference Between Employment Tax Liability and a Deposit?
The employment tax liability is the amount owed, and the deposit is a periodic payment of the estimated tax liability. Employers who don’t make timely deposits will be subject to more penalties.
If your business’s employment tax liability that is greater than $2,500, you must deposit employment taxes on a monthly, semi-weekly, or next-day basis, depending on the amount owed during the quarter. If you fail to make these deposits, the IRS will issue a failure to deposit penalty.
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Related Link: How R&D Credits Help with Payroll Taxes 
How FFCRA Paid Leave Tax Credits and the Employee Retention Credit Affect Tax Deferral
If an employer is eligible to claim FFCRA credits or the employee retention credit, the employer can defer its deposit and payment of the Social Security tax liability prior to determining:
- If the employer is entitled to the FFCRA paid leave credits.
- The amount of the tax deposits that the business may retain, anticipating these credits.
- The amount of advanced payments of these credits.
- The amount of any refunds, respective to these credits.
Ensure Your Tax Deferral Deposits are IRS Compliant
While the tax deferral relief helped many employers during the tumultuous times of 2020, it is creating a bit of a headache today for some employers. To ensure your tax deferral deposits are current and accurate, you may want to consult with tax experts that specialize in helping SMEs and startups.
TaxRobot has a team of experienced accountants that can help you navigate the intricacies of the CARES Act and other relief programs. You may also be interested in our intuitive software that automates and assesses areas where you can improve your business’s efficiency and productivity to optimize your tax return.