Section 2302 of the March 2020 CARES Act provided many stimulus opportunities to employers, one of which was the option for all employers to defer/postpone the payment of the employer portion of FICA taxes due on wages paid March 27-December 31, 2020 until the end of 2021 and 2022—specifically 50% of the FICA tax deferral due December 31, 2021 with the remaining 50% due December 31, 2022. The IRS just released PMTA 2021-07 which discussed the imposition of “failure to deposit” penalties on the deferred FICA taxes, and takes a very “hard-line” approach on how to calculate the late deposit of the deferred FICA tax deposits. Before we get to what the IRS has to say in PMTA 2021-07, let’s detail the basis provisions of the CARES Act FICA deferral opportunity which was provided to all employers in March of 2020.
THE OPPORTUNITY TO DEFER/PAY LATER THE EMPLOYER SHARE OF FICA TAXES ON 2020 PAYROLLS
The CARES Act provided every employer the option to defer/postpone the payment of the employer share (not employee withholdings) of FICA tax (6.2% of wages up to the FICA wage limit) from it’s regular due dates in 2020 into 2 equal installments of taxes due at the end of 2021 and the end of 2022. Employers who chose the option to defer/postpone the payment of the employer share of FICA taxes for payrolls paid March 27-December 31, 2020 NOW OWE THE DEFERRED FICA TAXES IN 2 50/50 INSTALLMENTS DUE DECEMBER 31, 2021 AND DECEMBER 31,2022. Employers who selected this tax deferral option reduced their 2020 IRS Form 941 tax deposit amounts by the amounts of the employer share of FICA tax otherwise due to be paid during 2020. The employer quarterly Form 941 reported this FICA tax deferral on line 13(b) of their quarterly 941 form they filed with the IRS.
HOW MUCH DO YOU OWE IN DEFERRED TAXES?
Every employer who chose to defer/postpone the employer share of FICA taxes should have kept track of this tax obligation due to the IRS, in some manner, with many actually reporting the FICA tax deferral on the Company’s books/general ledger. The IRS has recently sent out “reminder letters” to taxpayers which report how much each employer owes in deferred FICA taxes, PER QUARTER, in 2020. If you did not receive the IRS reminder letters, you still owe the deferred tax. We do recommend that every employer who deferred FICA taxes reconcile the IRS reminder letters, quarter by quarter for 2020, to their own records of deferred taxes quarter by quarter during 2020. IT IS VERY IMPORTANT THAT AN EMPLOYER VERIFY THAT THEIR RECORD OF DEFERRED TAXES FOR 2020 IS ACCURATE SINCE UNDERPAYING A DEPOSIT OF THOSE DEFERRED TAXES COULD BE COSTLY AS TO LATE DEPOSIT PENALITIES. An employer can also find their FICA tax deferrals by quarter by looking at their quarterly Form 941 tax transcripts for 2020—–the quarterly deferred amount will be listed as “Section 2302 Tax Deferral” on each quarterly Form 941.
HOW TO REPAY YOUR DEFERRED FICA TAXES FROM 2020
The law makes it clear that an employer must pay at least 50% of it’s FICA tax deferral from 2020 by December 31, 2021, with the remaining 50% amount due on/before December 31, 2022. The IRS has indicated that the employer can pay the deferred tax obligations by the EFTPS system (preferred method/electronic) or by credit card or check. The IRS also makes it clear that the amounts paid must be reported separately from other taxes such that the IRS can identify the payments as those pertaining to FICA taxes deferred from 2020. Finally, the deferred FICA taxes must be paid “separately” for each quarter of deferred taxes, with at least 50% of each quarter’s FICA tax deferral being paid specifically for each quarter—so a payment via the EFTPS system must specify that it is a payment of FICA deferred taxes AND for the specific quarter to which it pertains. Many employers deferred taxes for quarters 2, 3 and 4 of 2020 and the employer’s payments of deferred FICA taxes must be at least 50% per quarter by December 31, 2021—the IRS reminder letters report the deferred taxes owed PER QUARTER—-the employer must separately pay at least 50% of the deferral for EACH QUARTER to avoid a penalty for late deposit of the deferred taxes.
ACCOUNTING AND TAX DEDUCTION MATTERS
Cash basis taxpayers will generally deduct their share of FICA taxes when they are PAID—-Accrual basis taxpayers may have already deducted their deferred FICA taxes when due, depending on how they dealt with the issue of “recurring payments” (Talk to your CPA as to whether you have already deducted the employer share of the deferred FICA tax payments, based on your “method of accounting”). IF you are a cash basis taxpayer, you may wish/choose to pay all deferred FICA taxes by the end of 2021 so that you can claim tax deductions for all that you owe on your 2021 business tax return. Your CPA can help you decide on whether to pay 100% of all owed taxes by the end of 2021 (instead of deferring 1/2 the taxes to be paid by the end of 2022), which will consider your cash position, cash flow and tax ramifications/tax brackets in 2021 and expected for 2022.
IRS TAKES HARD-LINE APPROACH ON PENALTIES FOR LATE DEPOSITS OF DEFERRED TAXES
The IRS released PMTA 2021-07 which discussed how they will penalize employers for late deposit of their deferred FICA tax obligations. The IRS guidance indicates that if an employer fails to pay at least 50% of their deferred tax by the end of 2021, they will likely incur a tax penalty equal to 10% of the entire tax deferral amount—not just the 50% amount due December 31, 2021. The IRS also indicates that if an employer timely deposits 50% of the total deferral amount by the end of 2021 but fails to deposit all of the remaining amount by the end of 2022, the penalty will be 10% of the entire tax deferral amount. IT IS IMPERATIVE THAT EACH EMPLOYER CORRECTLY ASCERTAIN HOW MUCH THEY OWE IN TOTAL DEFERRED FICA TAXES AND MAKE SURE THEY PAY AT LEAST 50% BY THE END OF 2021 AND THE OTHER 50% BY THE END OF 2022. The best way to avoid the IRS late deposit penalties is to make payments through the electronic EFTPS system (as opposed to mailing a check) AND to verify the amounts owed with your own records/general ledger, which are reconciled to the IRS reminder letters and perhaps IRS transcripts which report the FICA tax deferrals.
HOW CAN ACCUPAY HELP YOU?
AccuPay can generally review IRS quarterly Form 941 transcripts for our clients to verify the amounts of FICA tax deferrals reported on your quarterly 941 payroll tax returns, so that you can cross-reference those transcript amounts to your IRS reminder letters and your own records of FICA tax deferrals, quarter by quarter. AccuPay can also assist our clients with collecting and paying accurate FICA tax deferrals, BY QUARTER, for at least 50% of each quarter’s amount due OR, in some cases, our clients may choose to pay 100% of what is owed simply to be done with the obligation, get it “off their books,” and in some cases claim the entire tax obligation on their 2021 business income tax return.
WHEN DO YOU NEED TO START PLANNING FOR THE PAYMENT OF DEFERRED FICA TAXES?
Now!! You need to determine how much is owed, cross-validate the amount, quarter by quarter, and determine if you are paying exactly 50% of the amount due by December 31, 2021, OR instead, prefer to pay the entire deferred FICA tax obligation on/before December 31, 2021. If you want AccuPay to facilitate the payment of your deferred FICA tax, we need to do so no later than December 15, 2021 (and ideally before that) so that neither of us will be rushing to calculate and make the payments by year-end 2021. We are available to make the deferred FICA tax payments for all employers who are clients of AccuPay as of December 15, 2021, to include newer clients who we began serving after they elected to postpone/defer FICA taxes during 2020. AccuPay’s fee for helping employers pay these deferred taxes will be $50, to include helping ensure the accuracy of the payment amounts, quarter by quarter, and actually collecting and routing the taxes to the correct quarters in 2020. An employer can choose to make their own payments by signing up for the EFTPS system with the IRS, and routing their payments directly from their bank account to the IRS quarters for 2020.
IF YOU WOULD LIKE ACCUPAY TO ASSIST YOU IN THIS PROCESS—HERE IS WHAT YOU DO
- Gather all IRS reminder letters and provide them ASAP to your payroll specialist, but no later than November 1, 2021—we will compare your IRS letters with your IRS transcripts for each quarter to identify any discrepancies.
- Review your own FICA tax deferral records to see if they agree with the IRS letters which you hopefully have received—let us know of any differences.
- Make your decision whether to pay exactly 50% of the total FICA tax deferral amount by December 31, 2021 OR let us know if you choose to pay more than 50% by December 31, 2021—we do expect some employers will wish to pay their entire deferred FICA tax obligation by year-end 2021 to get the liability “off their books” and/or for income tax purposes—-talk to your CPA about this decision!!
We are happy to answer any questions you may have about your deferred FICA tax from 2020—simply ask your payroll specialist or firstname.lastname@example.org.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.