Knowledge Base
Did you recently receive a letter from the IRS for tax periods ending June 30, 2020; September 30, 2020; and/or December 31, 2020?
Most likely the letter was a reminder informing you of the deferred employer’s share of social security taxes in regards to the COVID-19 pandemic.
Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, allowed employers to defer the payment of the employer share of Social Security or Railroad Retirement payroll taxes otherwise required to be deposited between March 27 and Dec. 31, 2020, and to pay the deferred taxes in two installments — the first half is due December 31, 2021, and the remainder by December 31, 2022.
The deferral of the employer’s share of social security taxes was to provide help in the short-term while employers struggled with the ever changing business environment caused by the COVID-19 pandemic. While the deferral of the tax payment provided employers relief from having to deposit the taxes owed at the time, the deferral did not remove the liability for the taxes owed.
Employers are required to deposit the payment for at least 50% of the deferred amount for each quarter by December 31, 2021 and the remaining balance by December 31, 2022. Employers are allowed to make payments on the deferred amount before the due dates and the IRS will apply the payments first against the balance due for December 31, 2021, and then for the balance due for December 31, 2021.
The IRS has issued guidance permitting an employer to pay the deferred amount early. The employer may pay the amount it owes electronically using EFTPS, by credit or debit card, or by a check or money order. The preferred method of payment is EFTPS. If an employer is using EFTPS, in order to pay the deferred amount, an employer that files Form 941 should select Form 941, the calendar quarter in 2020 to which its payment relates and payment due on an IRS notice in EFTPS. An employer that files annual returns, like the Form 943, 944, or CT-1, should select the return and 2020 tax year to make a payment. The employer cannot combine payments for multiple quarters. A separate payment must be made for each quarter.
Example: An employer deferred $10,000 in 2Q 2020; $30,000 in 3Q 2020; and $50,000 in 4Q 2020 of its employer share of social security taxes for a total of $90,000 deferred employer’s share of social security taxes.
If the employer files Form 941 wants to pay the required 50% payment of $45,000 of its deferred employer’s share of Social Security tax, $5,000 of which is attributable to the second calendar quarter of 2020, $15,000 of which is attributable to the third quarter of 2020, and the other $25,000 of which is attributable to the fourth calendar quarter of 2020, the employer must make three payments. Each payment should be made for the calendar quarter to which the deferral is attributable, and the entry in EFTPS must reflect it as a payment due on an IRS notice. Thus, the employer would pay $5,000 for the second calendar quarter of 2020 and select payment due on an IRS notice in EFTPS while doing so, separately pay $15,000 for the third calendar quarter of 2020 using EFTPS and make the same selection, and would also separately pay $25,000 for the fourth calendar quarter of 2020 using EFTPS and make the same selection.
If the payment is made as a lump sum payment, the payment will be applied to the quarter indicated in the payment resulting in an overpayment for that quarter and an underpayment in the remaining quarters. The underpayment would then result in additional penalties and interest being assessed for the quarters not paid.