Repayment of Deferred Social Security Taxes: Four Things to Know

Michael Orton

The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allows employers to defer the deposit and payment of the employer’s share of Social Security taxes.

Under sections 2302(a)(1) and (a)(2) of the CARES Act, employers may defer deposits of the employer’s share of Social Security tax due during the “payroll tax deferral period.” The payroll tax deferral period began on March 27, 2020 and expired on December 31, 2020.  This deferral amounts to an interest-free loan for employers, with the goal of providing employers more liquidity during the COVID-19 pandemic.

There are several important considerations regarding the deferral of the employer share of Social Security taxes, this alert will address four that are critical but sometimes overlooked.

1.   First Deadline is Fast Approaching

The deferred deposits of the employer’s share of Social Security tax must be deposited by the following dates (referred to as the “applicable dates”) to be treated as timely (and avoid a failure to deposit penalty):

  • On January 3, 2022, 50% of the deferred amount; and
  • On January 3, 2023, the remaining amount.

Note that the CARES Act and most IRS correspondence use December 31, 2021 and December 31, 2022 as the statutory deadlines.  However, in a memo from the IRS Chief Counsel office (PTMA-2021-07), the IRS confirmed that the deadlines are extended to January 3rd under the weekend/holiday rule of IRC § 7503.

If an employer pays any amount before the applicable dates, such payment is first applied to reduce the liability for an amount due on December 31, 2021 with any remainder to the amount due on December 31, 2022.  The applicable IRS examples are provided below for reference:

Example 1:

If an employer was eligible to defer $20,000 for the payroll tax deferral period, paid $0 of the $20,000, and deferred $20,000 for the payroll tax deferral period, the employer needs to pay $10,000 no later than December 31, 2021 and the other $10,000 on December 31, 2022.

 Example 2:

If an employer was eligible to defer $20,000 for the payroll tax deferral period, but it paid $15,000 of the $20,000, and deferred $5,000 for the payroll tax deferral period, the employer does not need to pay any additional amount by December 31, 2021, since 50% of the eligible deferred amount (or $10,000) has already been paid and is first applied against the employer’s amount due on December 31, 2021. The employer must pay the remaining $5,000 by December 31, 2022.

 

2. How to Pay the Deferred Taxes

There are several payment methods acceptable by the IRS, but the preferred method of payment is EFTPS. In order to pay the deferred amount using EFTPS, an employer that files Form 941 should select Form 941, the calendar quarter in 2020 to which its payment relates, and payment due on an IRS notice in EFTPS.  Further, the IRS explained that EFTPS should have a new option to select “deferral payment.”  The employer selects deferral payment and then changes the date to the applicable tax period for the payment.  For more information, visit EFTPS.gov, or call 800-555-4477. An applicable IRS example is provided below for reference:

Example 3:

If an employer that files Form 941 wants to pay $300 of its deferred employer’s share of Social Security tax, $100 of which is attributable to the second calendar quarter of 2020, and the other $200 of which is attributable to the third calendar quarter of 2020, the employer must make two payments through EFTPS.

Each payment should be made for the calendar quarter to which the deferral is attributable, and the entry in EFTPS must reflect it as a payment due on an IRS notice. Thus, the employer would pay $100 for the second calendar quarter of 2020 using EFTPS and select payment due on an IRS notice in EFTPS while doing so and would also separately pay $200 for the third calendar quarter of 2020 using EFTPS and make the same selection.

 

3. Coordination with COVID-Related Tax Credits

Employers that fully claimed the FFCRA or the Employee Retention Credit (ERC) were also permitted to defer deposit and payment of the employer’s share of Social Security tax.  Likewise, employers that deferred the employer’s share of Social Security tax could also claim either or both the FFCRA and the ERC. Therefore, any employer that claimed either the FFCRA or the ERC will likely to be required to repay the full amount of deferral. The applicable IRS examples are provided below for reference:

Example 4:

Employer F is eligible for the paid sick leave credit and employee retention credit. In its first payroll period of the second quarter of 2020, Employer F pays $10,000 in qualified wages and $3,500 in qualified sick leave wages under the FFCRA, among other wages for the payroll period. Employer F has a federal employment tax deposit obligation of $9,000 for the first payroll period of the second quarter of 2020 (of which $1,500 relates to the employer’s share of Social Security tax). Employer F reasonably anticipates a $5,000 employee retention credit (50% of qualified wages) and a $3,500 credit for paid sick leave (100% of qualified sick leave wages) thus far for the second quarter.

Employer F first defers deposit of the $1,500 employer’s share of Social Security tax. This preliminarily results in a remaining federal employment tax deposit obligation of $7,500. Employer F then reduces this federal employment tax deposit obligation by the $3,500 anticipated credit for qualified sick leave wages, leaving a federal employment tax deposit obligation of $4,000. Finally, Employer F further reduces the deposit of all remaining federal employment taxes by $4,000 for the $5,000 anticipated employee retention credit for qualified wages. Employer F will not incur a failure to deposit penalty under section 6656 of the Code for reducing its federal employment tax deposit for the first payroll period of the second quarter to $0.

The amount of the excess $1,000 in employee retention credit available is refundable as an overpayment. Employer F may request that the $1,000 overpayment be credited or refunded when it files its second quarter Form 941.

Employer F may defer payment of the $1,500 employer’s share of Social Security tax (along with any other employer Social Security tax imposed under section 3111(a) for the quarter) on its Form 941 for the second quarter of 2020.

 

4. Potential for Significant Penalties

In a memo from the Chief Counsel office (PTMA-2021-07), the IRS explained that if an employer pays any portion of the deferred Social Security taxes past the applicable due date then the late payment penalties would apply to all of the employer’s deferred Social Security taxes. That means that the IRS will likely impose a 15% late deposit penalty and interest on all deferred Social Security taxes if an employer does not timely repay the required amount by the applicable due dates.  Therefore, it is very important to timely repay the full amount by the applicable due date to avoid unnecessary penalty and interest charges.  An IRS example is provided below for reference:

Example 5:

Continuing with Example 4, Employer F will not be required to pay any portion of the deferred amount until December 31, 2021, at which time 50% is due, with the remaining amount ($750) due December 31, 2022. If Employer F fails to pay the required amounts at those times, Employer F’s deferred deposits will lose their deferred status and may be subject to failure to deposit penalties. Employer F may also be subject to failure to pay penalties accruing from the deferred due date for payment.

For additional information concerning this Alert, or related questions, please contact:

 

References:

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