Remitting the First Installment of Deferred Social Security Taxes
Employers who chose to defer payment of certain employment taxes until December 31, 2021, and December 31, 2022, should be receiving a CP256V reminder notice from the IRS with information pertaining to remittance of the first installment due December 31, 2021. It is important that employers timely remit the required payments to avoid significant penalties.
Section 2302 of the Coronavirus Aid, Relief, and Economic Security Act included a provision allowing employers to defer the deposit and payment of the employer’s share of Social Security tax and certain railroad retirement taxes (“employer’s share of Social Security tax”) due between March 27, 2020, and December 31, 2020. Employers must remit 50 percent of the deferred tax by December 31, 2021, and the remaining amount by December 31, 2022.
How to Determine & Pay the Amount of Deferred Tax for the Employer’s Share
The IRS has indicated on its explanation webpage for the CP256V notice that employers must make a separate payment of the deferred tax and should not include the deferred tax as an additional amount with a current-period payroll tax deposit.
A separate payment should be made for each deferral period. For example, if an employer was required to remit payroll taxes quarterly and chose to defer taxes for each calendar quarter in 2020, then the employer would need to submit four separate payments by December 31, 2021, for each quarter of 2020. Due to weekends and holidays, the actual due dates are January 3, 2022, and January 3, 2023, for the two deferred installment due dates. The Form 941 instructions and CP256V notice explanation indicate the deferred tax amount can be paid separately using the Electronic Federal Tax Payment System (EFTPS), credit or debit card, or check or money order. If making a payment using EFTPS, select the form number, tax period, and the option to pay the deferred amount. For example, if remitting a payment for the second quarter of 2020, the form number and tax period would be Form 941 and the second quarter of 2020. Please note that EFTPS payments are required to be initiated at least one calendar day prior to the due date. If paying by check or money order, employers should include a 2020 Form 941-V payment voucher (for quarterly filers).
The CP256V notice should provide employers with the amount of deferred tax that is owed by January 3, 2022. Taxpayers may receive a separate CP256V notice for each deferral period. The amount of deferred tax that is owed with the first installment is the excess of 50 percent of the Social Security tax that could have been deferred for that deferral period over the actual Social Security deposits made for the period.
The IRS included an example on its frequently asked questions page and in the Form 941 instructions. For example, an employer’s share of the Social Security tax for the third quarter of 2020 was $20,000, and it deposited $5,000 of the $20,000 during the third quarter of 2020 and deferred $15,000 on its Form 941. The taxpayer would be required to remit only $5,000 with the first deferred tax installment on January 3, 2022, because it is only required to remit 50 percent of the Social Security tax it could have deferred ($20,000 * 50% = $10,000) and the employer had already remitted $5,000 with the original Form 941.
How Should Self-Employed Individuals & Schedule H Filers Remit Their Payroll Tax Deferral?
Individuals who deferred a portion of their 2020 Social Security tax attributable to their self-employment tax or household employee tax obligations should remit their deferred tax installments similarly to other employers. Per IRS guidance on its website, individuals can submit payments using EFTPS, a credit or debit card, or a check or money order. Individuals should remit separate payments and apply them to the 2020 tax year. Individuals should not remit with their current-year (2021) estimated tax installments. Individuals also should be receiving a CP256V notice reminder.
Late Payment Penalties
In a Chief Counsel memo issued by the IRS on June 21, 2021, the IRS indicated that remitting any balance of either deferred tax installment late will subject the entire deferred tax amount to a 10 percent failure-to-deposit penalty under Internal Revenue Code §6656. For example, if an employer deferred $50,000 of tax and timely remitted the first installment of $25,000 on January 3, 2022, but paid the second installment of $25,000 late (after January 3, 2023), then the entire $50,000 amount of deferred tax would be subject to a $5,000 penalty (10 percent of the original amount deferred). Thus, it is important that employers pay the correct amount of tax for each installment and do so timely.
Employers Who Elected to Defer the Employee’s Share of Social Security Tax
Employers who were eligible to and deferred the employee’s share of Social Security tax on wages paid from September 1, 2020, to December 31, 2020, pursuant to the executive order signed by President Donald Trump on August 8, 2020, were required to remit the deferred Social Security tax ratably throughout 2021. See the instructions for Form 941, IRS Notice 2020-65, and IRS Notice 2021-11 for more information.
To avoid significant penalties, employers and applicable individuals should prepare now to timely pay their first installment of the deferred Social Security tax. Employers should review each CP256V notice to determine if they agree with the payment amount shown or can reconcile why it does not match the amount expected.
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