What Is Payroll Tax Deferral and How Does It Affect Small Businesses?
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Payroll tax deferral was one of the initiatives passed to help US businesses survive the COVID-19 pandemic. If you took advantage of payroll tax deferral, you likely already repaid half of the Social Security taxes you owed in 2021. Now it’s time to begin planning to repay the other half by the end of 2022.
As a small business owner or self-employed individual, it’s essential to finish paying off your deferred amount because failure to pay can result in a penalty on the entire amount, not just the amount remaining. Let’s break down the ins and outs of payroll tax deferral and what you need to know moving forward.
What is payroll tax deferral?
The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act gave employers the option of deferring the deposit and payment of their share of Social Security taxes and self-employed individuals the option to postpone the payment of certain self-employment taxes. The 2021 American Rescue Plan Act extended these benefits to help business owners.
Businesses with over $2,500 in employment tax liability must pay employment taxes incrementally on a return period based on the total of their liability (i.e., semi-weekly, monthly, next-day). For most employers, the repayment period is a calendar quarter. Businesses that fail to deposit their employment taxes on time have to pay a penalty on top of the taxes owed.
Under sections 2301(a)(1) and (2) of the CARES Act, employers may defer their share of deposits for Social Security taxes during the “payroll tax deferral period” and the payments on the wage taxes incurred during that period.
What payroll taxes are active in 2022?
Active payroll taxes for employers in 2022 include:
- Social Security taxes: 6.2% for on the first $147,000 each employee makes, with a maximum tax of $9,114 per employee (employees each pay the same amount for their portion of Social Security tax)
- Medicare tax: 1.45% on the first $200,000 of wages, then 2.35% on wages exceeding $200,000 (employees each pay the same amount for their portion of Medicare tax)
- Federal unemployment tax: 0.6% on the first $7,000 of wages (not matched by employees)
- State unemployment tax: varies by state (employees match in certain states)
Self-employed individuals pay their own income tax. This includes the full amount of Social Security and Medical taxes, or FICA taxes–both the employer and employee portion.
Are there any changes to payroll taxes in 2022?
While the Social Security tax rate will stand firm at 6.2%, the wage base for employees will increase to $147,000, meaning employers pay 6.2% on the first $147,000 each employee earns. The combined tax rate for Social Security and Medicare taxes will stay the same at 7.65%, with Medicare taxes imposed at a rate of 1.45% for both employers and employees.
For self-employed individuals, including independent contractors, the taxable earnings base will also increase to $147,000 at a rate of 15.3% for FICA taxes. Keep in mind that you do not have to pay self-employment taxes if your annual net earnings are less than $400.
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What is the deadline for deferred payroll taxes?
Employers should have paid at least half of the amount deferred before December 31, 2021, and the remaining portion is due by December 31, 2022. For instance, if you were approved to defer $4,000 of payroll taxes, you should have already repaid at least $2,000 in 2021. That means you owe another $2,000 (or less) before the end of this calendar year to cover the total amount.
How much can employers defer?
Under the CARES Act, employers could defer their share (50%) of Social Security taxes on wages (6.2% on all earnings) made between March 27, 2020, and December 31, 2021.
How is tax deferral paid back?
Most businesses use Form 941, Employer’s Quarterly Federal Tax Return to calculate, report, and pay payroll taxes. However, employers who file annual employment tax returns with Form 943, Form 944, and Form CT-1 are also eligible for deferred payroll taxes. Self-employed individuals will use Form 1040-ES, Estimated Tax for Individuals.
The IRS offers a few methods for taxpayers to pay deferred payroll taxes.
Employers and self-employed individuals can submit deferral payments through the Electronic Federal Tax Payment System (EFTPS), credit or debit card, or check or money order.
The EFTPS online portal has an option to make a deferral payment. After logging in, select Deferred Social Security Tax on the Tax Type Selection screen, and change the date to the applicable tax period to see your balance.
Self-employed individuals can also use IRS Direct Pay. You can apply a payment to the 2020 tax year by selecting “Balance Due” as your reason for payment and “installment agreement” if you’re paying with a card.
What happens if deferred payments aren’t repaid on time?
An IRS notice regarding deferred payroll tax payments states that “failure to deposit any portion of the deferred taxes by the applicable due date would result in a penalty for the entire deferred amount going back to the original due date.”
Even if you’ve already paid half of your balance, it’s crucial to pay the remaining balance before the end of the year to avoid a missed deposit penalty. The good news is that although the deadline is December 31, because of the holiday, you actually have until January 3, 2023, to submit the remaining portion of your payment.
What is the difference between deferring and withholding payroll taxes?
Payroll tax withholding is a mandatory practice where an employer reserves a portion of an employee’s gross wages to cover income tax obligations. The employee’s income rate determines the amount withheld. Payroll tax deferral only applies to the employer’s share of Social Security taxes.
What’s the difference between a tax deferral and an employee retention credit?
The employee retention credit was another provision under the American Rescue Plan Act that gave businesses a payroll tax credit of up to $10,000 for each full-time employee per quarter until January 1, 2022. Employer tax deferral only postpones payment instead of limiting the amount owed.
There are significantly fewer restrictions for payroll tax deferral compared to employee retention credits.
Payroll tax deferral is:
- Open to all employers, employees, and self-employed individuals
- Available for taxed income between March 27, 2020, through December 31, 2021
- Only applicable to the employer’s portion of Social Security Deposit
- A postponement of paying the amount owed (50% by December 31, 2021, and 50% by December 31, 2022)
Additionally, payroll tax deferral has no impact on FFCRA or PPP loans.
Payroll tax credit:
- Offers employers a partial or full closure by law with a significant decline in gross receipts
- Is available to companies with 100 or more full-time employees, working or not
- Is not available for self-employed individuals
- Covers taxed income between March 13, 2020, to December 31, 2021
- Affects the employer portion of qualified Social Security taxes
- Comes as a refundable credit
- Doesn’t offer credit for PPP loans or FFCRA credits
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This post is provided for informational purposes and should not be considered legal advice. Talk to a legal professional such as a CPA for more info.