To help small businesses during the COVID-19 pandemic, the government made changes in 2020 to provide relief relating to withholding and payment of certain employer and employee payroll taxes. The provisions don't reduce the taxes due, but they do delay the timing of payments to help with cash flow issues. It's important to be aware of the deadlines relating to these relief provisions and avoid problems with the IRS.
The Coronavirus, Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, included a payroll tax deferral under Section 2302. It allows employers to defer depositing and paying the employer's share of Social Security taxes (6.2%). This relief applies to all employers, including governmental entities. Businesses did not need to apply to be eligible. The deferral period for these taxes began March 27, 2020 (the date of the CARES Act enactment), and ended December 31, 2020.
Employers must deposit 50% of the amount eligible for deferral on or before December 31, 2021, and the remaining unpaid deferred amount on or before December 31, 2022. Employers may pay deferred amounts using the Electronic Federal Tax Payment System (EFTPS), by debit or credit card, or by mailing a check or money order when filing Form 941, Employer's Quarterly Federal Tax Return, although electronic payment is preferred. Failure to pay any portion of the deferred taxes by the due date for the applicable installment will result in a penalty on the entire deferred amount.
Employers that receive Paycheck Protection Program (PPP) loans can defer the deposit and payment of the employer share of taxes even if their PPP loan has been forgiven. This was a change made in June 2020 by the PPP Flexibility Act.
Section 2302 of the CARES Act was intended for employers but also applies to self-employed individuals. It gives self-employed individuals the option to defer the 50 percent “employer share" of Social Security taxes on self-employment net earnings for the period March 27, 2020, to December 31, 2020. These payroll tax deferrals must be paid in two installments by the same dates as noted above for the employer's share of deferred Social Security taxes, and the same penalties for late payments apply.
The employee share of Social Security taxes on self-employment net earnings must be paid in full, along with other self-employment taxes. The full self-employment Social Security taxes were reinstated on January 1, 2021.
In August 2020, the President signed an executive order giving employers an additional option to defer withholding and paying the employee's portion of Social Security taxes on certain wages paid during the period beginning September 1, 2020, and ending December 31, 2020. The criterion for this payroll tax deferral was for those employees earning less than $4,000 in wages subject to Social Security taxes every two weeks, or the equivalent amount for other pay periods. It was mandatory for government entities for military service members and federal employees and optional for most other employers. It did not apply to self-employed individuals.
The Treasury Department issued IRS Notices 2020-65 and 2021-11 to implement the executive order. Employers may withhold employee Social Security taxes from employee pay for the period September 1 through December 31, 2020, defer payment of the taxes, and pay them ratably in 2021. The repayment period for the employee portion is January 1, 2021, through December 31, 2021 (extended from April 30, 2021). If the taxes are not paid on time, they will be subject to late payment penalties and interest on the unpaid balance beginning January 1, 2022.
Amounts withheld from employees for this payroll tax deferral will be in addition to Social Security taxes withheld and due related to 2021 wages. Deferred Social Security taxes not paid by December 31, 2021, will be subject to penalties and interest. Employers are liable for any deferred 2020 employee Social Security taxes whether or not they are able to fully withhold and collect the amounts from employee pay.
The IRS has a number of helpful resources on its website, including Coronavirus Tax Relief news for individuals and businesses.