The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, enacted in response to the COVID-19 pandemic, allowed employers to defer the payment and deposit of the employer’s share of Social Security tax.
Employers were able to take advantage of the deferral by making quarterly Social Security tax payments and deposits via the EFTPS system that were less than what would otherwise have been required, or by not making Social Security tax payments at all. Employers reported the deferred amounts on that quarter’s filed Form 941. If an employer also qualified for a credit against the employer’s share of the Social Security tax, such as the employee retention credit (“ERC”), deferrals could be made in addition to the credit.
Deferrals under this program, unlike the ERC, must be paid back – one half on December 31, 2021 and the remainder on December 31, 2022. On December 31, 2021, one half of the deferred amount was added back to the taxpayer’s account as an amount due. The taxpayer was then required to make a payment (in this amount) via the EFTPS system and clearly designate it for this quarter. On December 31, 2022, the remainder of the deferred amount will be added back to the taxpayer’s account, with the same expectation of repayment by the taxpayer.
Example: Assume a taxpayer deferred $10,000 of its Social Security tax due for the 2nd quarter of 2020 and $8,000 of its Social Security tax due for the 3rd quarter of 2020. On each of December 31, 2021 and December 31, 2022, the taxpayer’s account would show $5,000 due for the 2nd quarter and $4,000 due for the 3rd quarter. The taxpayer must clearly make a $5,000 payment designated for the 2nd quarter and a $4,000 payment designated for the 3rd quarter as repayment. If the taxpayer lumps the payments together into one $9,000 payment or does not clearly designate the correct quarter for payment, penalties may result.
The IRS intends to issue a reminder notice to employers before December 31, 2022. Employers should receive a separate notice indicating the amount due for each quarter. However, employers reported that these reminder notices were not issued in advance of the first payment date of December 31, 2021. Therefore, employers should carefully review their records (in particular, the deferred amounts reported on each quarter’s Form 941) to determine the correct repayment due for each quarter and make timely payments by December 31, 2022 with or without notification from the IRS.
Employers failing to make the required payments by December 31, 2022 will receive failure to pay and failure to deposit penalties.
- Failure to pay: The failure to pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25%.
- Failure to deposit: The failure to deposit penalty is determined based on the number of days your deposit is late. The penalty rate starts at 2% of the unpaid deposit for deposits made one-to-five calendar days late and increases to 10% for deposits made more than 15 calendar days late.
Please consult with your LMC professional should any questions arise.
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