The Coronavirus, Relief, and Economic Security Act (CARES Act) added a provision to allow business owners to defer the payment of a portion of their 2020 Social Security tax obligation until 2021/2022.
The amount of the deferral is the employer’s 6.2% share of social security and RRTA taxes. Anything that is collected from the employees (Federal withholding, Social Security and Medicare) are all still required to be remitted in accordance to your normal payment schedule. In addition, the employer’s share of Medicare is also still due along with the employee’s withholdings.
This program also applies to self-employed individuals. The deferral amount is 50% of the self-employment tax with one-half due in 2021 and one-half in 2022. The deferred self-employment taxes will not be required to be paid in as part of 2021 or 2022 estimated taxes.
The deferral period is applied to taxes from March 27, 2020, through Dec. 31, 2020. Any employer Social Security that is deferred is payable, 50% on Dec. 31, 2021, and 50% on Dec. 31, 2022.
The CARES Act specifically puts the burden for any deferral on the shoulders of the employer. If an employer is using a third party to process their payroll, it is still the employer’s obligation to make sure the required payments are made on the due dates, not the third party’s obligation.
Potential tax trap
It is assumed that any failure to deposit by these required dates will lead to significant underpayment penalties.
One big thing to note: this option is only allowed up until the point of indebtedness forgiveness from the Small Business Administration’s Paycheck Protection Program. With the PPP Loan program being so popular, this will dramatically limit the amount of time that entities that will be able to take advantage of this part of the legislation.
How to manage the program
Suggestions for managing the program:
- If you are working with a third-party payroll provider, let them know you would like to defer the employer’s share of their Social Security expense
- Create a separate general ledger liability account to track the unpaid portion of the employer’s Social Security costs
- Put calendar reminders for the end of 2021 and 2022 to make sure these taxes get remitted timely