Do I have to pay back the payroll tax deferment?
The short answer is "yes." The CARES Act employer payroll tax deferral was not a grant, nor was it a forgivable loan like some of the other COVID-19 tax relief for business owners.
Employers who opted to defer payment of the 6.2% employer portion of FICA taxes owed on the first $137,700 of an employee's wages during the deferral period must ultimately pay these taxes to the IRS. The deferral period was designed to help struggling small business owners by deferring — but not eliminating — a portion of their tax obligation.
What is the deadline for paying deferred employer payroll taxes?
Small business owners who took advantage of the CARES Act employer payroll tax deferral have some flexibility when it comes to making payments. One-half of the deferred taxes must be paid no later than December 31, 2021, with the remaining balance due by December 31, 2022. The IRS has indicated that it intends to issue reminders to employers before each applicable due date.
Note that the employer payroll tax deferral, addressed by this article, is different from the employee payroll tax deferral created through executive action by President Trump in August 2020. The original deadline for payment of employee deferrals was April 30, 2021. That deadline for employee-side payroll tax deferrals has been extended to December 31, 2021 by the Consolidated Appropriations Act (CAA), signed into law on December 27, 2020.
How do employers make payments to the IRS for deferred payroll taxes?
If you opted to defer some or all of the employer portion of FICA taxes for wages during the payroll tax deferral period, there are several ways you can make payments to the IRS.
Employers can make payments using the IRS Electronic Federal Tax Payment System (EFTPS) website, which is the method the IRS prefers. When making payments through EFTPS, employers who file Form 941 should indicate which 2020 calendar quarter the repayment relates to, reflecting the EFTPS entry as a payment due on an IRS notice. Employers who file annual returns should select the applicable return and the 2020 tax year when making a payment. Alternatively, you can pay by credit or debit card or by mailing a check or money order to the IRS.
Will the timing of employer payroll tax payments affect tax planning and deductions for current and future tax filings?
Although your deferred employer payroll taxes accrued in 2020, you may not be able to deduct them from income until they are actually paid. Regardless of whether you use the accrual or cash accounting method, if you intend to take advantage of the full deferral period and pay one-half by December 31, 2021 and the remaining half by December 31, 2022, you could deduct one-half for each tax year, 2021 and 2022.
However, if your business uses the accrual method, has a December 31 fiscal year end, and chooses to pay the deferred taxes before September 15, 2021, you may be able to claim the payment as a deduction on your 2020 taxes. If your business incurred losses in 2020 and you make payments by September 15, 2021, this might be an appealing option. For some employers though, it may make more sense to use the entire deferral period for cash flow purposes.
Talk to a professional for help with your tax situation
When you are focused on running your business, it can be difficult to stay on top of small business tax requirements, including federal, state, and local tax filings, maximizing available credits and deductions, and tax deferral opportunities. Fortunately, help is available when you need it. Reach out to a Rocket Lawyer network attorney for guidance and assistance specific to your small business today!
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.