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Payroll Tax Deferral

Payroll tax deferral is temporary economic assistance for employers carrying small businesses and self-employed professionals. The Corona virus Aid, Relief, and Economic Security (CARES) Act have passed a law on March 10, 2021, allowing employers to defer their share of social security tax.

This initiative was adopted to help people combat the temporary financial crisis that arose due to the pandemic. It was only mandatory for federal employees and military service members. Other employers were allowed to opt-out of such a scheme.

According to payroll tax deferral law:

  • Employers can delay the repayment of only their portion of social security tax that is 6.2% of employees’ wages.
  • Employers have to remit the employees’ share of social security tax to Internal Revenue Service (IRS) within the due time on behalf of the employees.
  • IRS allowed employers to postpone the payment of SST on the wages paid for the period beginning on September 1, 2020, and ending on December 31, 2020.
  • The threshold limit of wages or compensation paid bi-weekly should be less than $4000.
  • Self-employed individuals can withhold only 50% of the social security tax.
  • Self-employed professionals can defer tax on net income earned from their profession during the period starting from March 27, 2020, to December 31, 2020.
  • Employers have to remit the 50% deferred tax amount by December 31, 2021, and the remaining 50% by the end of 2022.
  • Interest, penalties, or additional tax will accrue on any unpaid deferred tax amount after the due date.
  • This act is applicable for only Social Security Tax deferral. Medicare taxes are not eligible for deferment.
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Will payroll tax deferral have to be paid back?

All employers and self-employed individuals who opted for payroll tax deferrals are required to repay the deferred tax amount in two installments.

Employers can withhold SST of 6.2% of wages or compensation paid to employees. They need to deposit 50% of the deferred SST amount to the IRS by December 31, 2021. However, this date is extended to January 3, 2022, as December 31 is a holiday.

The remaining amount of the deferred tax must be deposited by December 31, 2022.

Any deferred tax amount due after the given deadline will accrue interest, penalties, or other charges.

Self-employed individuals are also eligible to delay Social Security Tax payments. They can retain 50% of SST that is 6.2% of the net earnings from their self-employment. The procedure and the due date of payment for deferred tax are the same as applicable to the employers.

Who is eligible for payroll tax deferral?

The CARES (Coronavirus, Aid, Relief, and Economic Security) Act empowers all employers to defer their share of payroll tax. Employers liable to pay social security tax of 6.2% of the employees’ wages can put back such payment.

Self-employed professionals are also eligible for this act. They are allowed to defer 50% of certain taxes imposed on their net earnings from such self-employment.

Earlier, employees borrowing Paycheck Protection Program (PPP) loans were ruled out from such a facility.

PPP loans were sanctioned to small business owners to meet business expenditures, such as payroll, rent, or utilities. Since the PPP loan waiver notification has already been issued, the borrowers of this loan were restricted from deferring payroll taxes.

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However, this restriction was eliminated by the Paycheck Protection Program Flexibility Act on June 5, 2020. Thus, small business owners receiving the PPP loan are also eligible to defer 50% of social security tax.

How is tax deferral paid back?

Whether you are an employer or a self-employed individual, you need to repay the deferred amount of the payroll tax by the notified deadline.

Employers get two calendar years to pay back their share of social security tax.

For example, you have paid $100,000 to your employees as wages or compensation during the deferral period.

Thus, your share of SST is $100,000*6.2% = $6200.

You need to pay 50% of $6200 that is $3100, by January 3, 2022.

The deadline for paying off the remaining 50% of deferred tax is December 31, 2022.

Self-employed professionals can also defer 6.2% of their net income and pay it over the next two years.

How do you pay back deferred payroll taxes?

Employers can pay deferred tax any day on or before the due date through any of the following payment methods.

  1. Electronic Federal Tax Payment System
  2. Credit or Debit Card
  3. Bank Check
  4. Money Order

While making the payment of deferred tax, the employer must ensure to pay the tax separately. If the employer pays payroll tax with other taxes, the IRS system won’t recognize it as the portion of deferred social security tax.

  • The taxpayers must mandatorily apply with form 1040 for the tax year 2020 to keep the payment separate from the current year’s taxes.
  • Classify the payment as Deferred Social Security Tax on the form 1040.
  • The employers may also access the EFTPS online portal to make the payment hassle-freely. Just go to the official website of EFTPS and select the Deferral Payment option to pay the due amount.
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Who qualifies for the payroll tax credit?

Employees Retention Credit is a refundable credit scheme issued by the Coronavirus Aid, Relief, and Economic Securities (CARES) Act to encourage employers to retain full-time employees during the complete or partial shutdown phase due to the pandemic distress.

Under this act, employers are allowed a refundable credit up to $5,000 for retaining each full-time or equivalent employee from March 13, 2020 to December 31, 2020. And for the period from January 1, 2021 to June 30, 2021, employers are allowed a credit up to $14,000 for each employee.

Eligibility to Qualify for ERC

  • Employers who were ordered to shut down their businesses fully or partially
  • Employers who retained full-time employees from March 13, 2020 to June 30, 2021.
  • Employers whose gross receipts for the years 2020 and 2021 were reduced by more than 50% and 80% respectively, compared to 2019.
  • The employers who were not in business in 2019 can compare their gross receipts with the corresponding quarters.

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