What Does the Payroll Tax Deferral Mean for Self-Employed People?

The CARES Act allowed self-employed people to defer paying certain Social Security taxes in tax year 2020. Half of the deferred tax was due by Jan. 3, 2022, and the remainder is due by Jan. 3, 2023. Here's what you need to know about repayments.

by Alicia Tuovila
updated June 13, 2022 ·  2min read

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act offered various forms of financial relief to workers and businesses at the height of the COVID-19 pandemic in 2020. In addition to the better-known paycheck protection program (PPP) and Economic Injury Disaster Loan (EIDL) initiatives, the CARES Act also included an initiative that allowed the deferral of employer payroll taxes.

How is this important to self-employed people? If you're self-employed, you pay an amount equivalent to both the employer and employee portion of Social Security and Medicare taxes in the combined self-employment tax. As such, self-employed individuals were also permitted to defer half of their Social Security tax under the same rules.

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What Is the Payroll Tax Deferral?

The payroll tax deferral refers to the 2020 CARES Act provision that allowed employers and self-employed people to defer the employer's share of their Social Security taxes. The payroll tax deferral period began on March 27, 2020, and ended on December 31, 2020. The tax rate for Social Security is 6.2% for employers and 6.2% for employees. Therefore, your eligible payroll tax deferral was 6.2% of your self-employment income from that period.

If you took advantage of the deferral during this period, it's now time to repay your deferred taxes. The IRS sent a notice to taxpayers who took advantage of this option. However, if you know you used this option and did not receive a letter, you still must repay the taxes by the due dates.

The amounts deferred in 2020 are due over the following two years. Half of the deferred Social Security tax was due on January 3, 2022, and half is due by January 3, 2023. This extension is because of holiday and weekend dates around December 31 in both years.

How to Repay Your Deferred Taxes

You can repay your deferred amount at any time before the installment due dates. You can make payments in a variety of ways.

If you pay quarterly estimated taxes or other tax payments, be sure to repay your deferral in a separate payment. The IRS system cannot apply the payment to a deferred tax if you include it with other tax payments. Similarly, be sure to identify the payment as "deferred Social Security tax" and apply it to the 2020 tax year.

If you pay through the mail, use a money order, check, or cashier's check payable to the U.S. Treasury. The IRS warns taxpayers not to make cash payments in the mail. Send the payment to the address listed on your notice, if you received one. If you did not receive a notice, send it to the address listed on the IRS website based on where you live.

What Can You Do if You Cannot Repay the Taxes in Full?

If you cannot repay the taxes in full by the installment due date, you should still attempt to pay whatever amount you can. This will limit the amount you will have to pay in penalties and interest charges.

If the due date passes and you haven't paid the amount due in full, the IRS will send you a balance due notice. You should follow the instructions on the notice to make additional payments or apply for a payment plan.

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Alicia Tuovila

About the Author

Alicia Tuovila

Alicia Tuovila is an accounting and finance writer based in Tennessee. She holds an active Certified Public Accountant (… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.