– Maximum Deferral of Self Employment Tax Payments –
COVID-19 seized the globe by storm in 2020. The IRS enabled eligible employees and self-employed individuals to defer Social Security tax for a period during the pandemic to provide relief. Now is the moment for people (or their employers) to collect the deferred tax and pay it back. But, how does the maximum deferral of self-employment tax payments work? Let us dissect it for you.
What is it the CARES Act?
The first half of the delayed Social Security tax must be paid by December 31, 2021, and the second half must be paid by December 31, 2022.
CARES Payment Guidance
Individuals can pay the deferred amount on or before the due date, according to the IRS.
Taxpayers can use the Electronic Federal Tax Payment System (EFTPS) or pay by credit card, debit card, money order, or cheque, according to the instructions.
Individuals should keep these contributions separate from other tax payments, according to the rules.
This is to ensure that they are allocated to the deferred tax balance on the tax year 2020 Form 1040.
It is important to note if the payment for deferred tax is bundled with other tax payments or submitted with the current Form 1040, the IRS systems will not recognize it.
Taxpayers who pay their federal taxes by mail should label the payment as “delayed Social Security tax.”
To appropriately identify the type of payment, individuals making deferred Social Security tax payments through the EFTPS should pick “1040 US Individual Income Tax Returns” and “deferred Social Security tax.”
Additional Information on CARES Payment Guidance
If a taxpayer cannot make the entire delayed IRS tax payment by the due date, they should remit the utmost amount possible to avoid penalty and interest penalties.
The IRS gives the taxpayer notification of the balance outstanding if they do not pay the installment amount in full.
Individuals should make a payment or request for a payment plan by following the directions on the notice.
Additional information on postponed Social Security tax payments can be found on the IRS website’s “Paying Your Taxes” page.
Taxpayers can get more information on online tax payment methods, payment plans, and their individual tax accounts on this page.
The IRS has also created a part of their website dedicated to frequently asked questions about deferring and paying employment taxes.
The newly added questions relevant to self-employed individuals have been provided here.
Social Security Tax Deferral Overview
Employers, including self-employed individuals, might temporarily delay a portion of their Social Security (SS) tax under the CARES Act.
They establish the Employee SS tax deferrals by executive order and the Consolidated Appropriations Act.
This also extended the deferral payback deadline for the employee component.
However, under the CARES Act, the employee deferral has a shorter repayment time than the employer/self-employed deferral.
The deferral period for both employer and employee Social Security tax deferrals has ended.
If you postponed any Social Security taxes as an employer or employee, you must start returning them now.
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Social Security Tax Deferral and Self-Employed Individuals
Self-employed individuals can defer 50 percent of their Social Security tax part of self-employment tax from March 27, 2020, to December 31, 2020, thanks to a recently passed law.
During the deferment period, self-employed workers could delay 6.2 percent of their taxable income in Social Security tax (50 percent of their 12.4 percent Social Security tax burden).
Individuals who are employed themselves cannot delay the Medicare component of their self-employment taxes.
Form 1040, U.S. Individual Income Tax Return, can only use half of the Social Security tax.
The repayment time for the Social Security tax deferral is also greater for self-employed individuals.
The repayment period for self-employed persons (and employers) who deferred taxes in 2020 is:
1. December 31, 2021 (50 percent of the deferred amount)
2. December 31, 2022 (remainder)
Any excess of 50% of the maximum deferral amount is due in 2021 if you employ yourself, you can choose to only postpone part of their maximum deferral amount.
The remaining half of the payment is due in 2022.
If they entitled you to postpone $6,000 but only deferred $4,000, you will only have to pay the $1,000 difference in 2021 and the remaining $3,000 in 2022 ($6,000 / 2).
Self-Employed Social Security Tax Deferral Example
Let’s say your annual taxable income is $50,000.
You took advantage of the SS tax deferral in 2020.
The self-employed deferral is 50 percent of the Social Security share of self-employment taxes, or 6.2 percent, as a reminder.
Here’s how much you put off until 2020:
$50,000 multiplied by 0.062 equals $3,100.
During the year, you were eligible for and postponed a total of $3,100 in Social Security taxes.
The first $1,550 must be paid before December 31, 2021, and the remaining $1,550 must be paid by December 31, 2022.
How to Repay Self-Employed Social Security Tax Deferral
Individuals have the option of paying back their delayed Social Security tax by the due dates.
Self-employed individuals can make the following contributions to reimburse the deferred taxes:
The Electronic Federal Tax Payment System (EFTPS) is a system that allows you to pay your (EFTPS)
Using a debit or credit card
You can pay with a money order or a check.
Individuals should also do:
To guarantee that they applied the payments to their delayed balance, keep them separate from other tax payments.
Make the payment a “delayed Social Security tax” payment.
If you’re paying by EFTPS, choose “1040 US Individual Income Tax Returns” and “deferred Social Security tax” as your payment type.
When repaying, apply the amount to the 2020 tax year.
Other Must-Know Self-Employed Deferral of Social Security Tax Questions
Have more questions concerning the SS tax deferment and payback for self-employed people? We have solutions.
Can Self-Employed Individuals Defer 2021 Taxes, Too?
Individuals could only defer taxes until 2020. Self-employed people will have to pay back their loans in 2021 and 2022.
Can Individuals Pay More Than the 50% Repayment Amount?
Individuals can choose to contribute over 50% by the 2021 deadline.
If you want to pay over 50%, the remaining balance must be paid by December 31, 2022.
What Should Self-Employed Individuals do if They Can’t Pay by the Due Date?
Self-employed individuals who cannot pay the full amount of deferred tax should pay as much as they can by the installment due dates.
The IRS will send the taxpayer a balance due notification if they do not pay the amount in full.
If you receive a notice, make a payment and apply for a payment plan according to the guidelines.
Visit the IRS’s Paying Your Taxes page for further information on payment choices.
Where Can You Find More Information on The Self-Employed Social Security Tax Deferral Requirements?
Check out the IRS’s website or contact them directly for further information on self-employed Social Security tax deferral restrictions.
The IRS recently provided instructions on the penalty for late repayments and how to make deferred employment tax obligations.
Do I Have to Pay Back the Payroll Tax Deferment?
“Yes,” is the quick answer.
Employer payroll tax deferral under the CARES Act was neither a grant nor a forgivable loan.
This is in comparison to the other COVID-19 tax relief for business owners.
During the deferral period, employers who deferred payment of the 6.2 percent employer component of FICA taxes payable on the first $137,700 of an employee’s income must eventually pay these taxes to the IRS.
They created the deferral period to assist struggling small business owners by delaying but not completely erasing a portion of their tax liability.
What is the Deadline for Paying Deferred Employer Payroll Taxes?
Small business owners who have taken advantage of the CARES Act’s employer payroll tax deferral have some payment flexibility.
The first half of the deferred taxes must be paid by December 31, 2021, with the rest due by December 31, 2022.
Before each appropriate due date, the IRS has stated that it wants to send notifications to employers.
Note that the employer payroll tax deferral discussed in this article is distinct from the employee payroll tax deferral established by President Trump through executive action in August 2020.
Employee deferrals were supposed to be paid by April 30, 2021, according to the original deadline.
The Consolidated Appropriations Act (CAA), which was enacted into law on December 27, 2020, has extended the deadline for employee-side payroll tax deferrals until December 31, 2021.
How do Employers Make Payments to the IRS for Deferred Payroll Taxes?
There are various options for making payments to the IRS.
This is if you delayed some or all of the employer portion of FICA taxes for wages during the payroll tax deferral period.
Employers can use the IRS Electronic Federal Tax Payment System (EFTPS) website to make payments, which is a method that IRS’ prefers.
Employers who file Form 941 should designate which 2020 calendar quarter the repayment pertains to when making EFTPS payments, indicating the EFTPS entry as payment due on an IRS notice.
When making a payment, employers who file annual returns should choose the appropriate return and the 2020 tax year.
You can also pay by credit or debit card, or by writing a check or money order to the IRS.
Will the Timing of Employer Payroll Tax Payments Affect Tax Planning and Deductions for Current and Future Tax Filings?
They may not allow you to deduct them from your income until you pay them, although your delayed employer payroll taxes accrued in 2020,
If you intend to take advantage of the complete deferral period and pay one-half by December 31, 2021, and the remaining half by December 31, 2022, you might deduct one-half for each tax year, 2021 and 2022.
You can do this regardless of whether you use the accrual or cash accounting technique.
If your company employs the accrual method, has a fiscal year-end of December 31, and pays the deferred taxes by September 15, 2021, they may entitle you to deduct the payment on your 2020 taxes.
This may be an appealing alternative if your business suffered losses in 2020 and you make payments by September 15, 2021.
However, for certain companies, using the entire deferral period for cash flow considerations may make more sense.
Talk to a Professional for Help With Your Tax Situation
It’s tough to remain on top of small company tax needs, such as federal, state, and local tax filings, optimizing available credits and deductions, and tax deferral opportunities.
This is difficult especially when you focus on running your firm.
Fortunately, help is accessible whenever you require it.
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How Does This Program Apply to People Who Employ Themselves?
If your fiscal year ends between March 27 and December 31, 2020, you can also defer self-employment tax.
You can defer half of the Social Security tax you’ll have to pay in 2020 based on your net earnings if you employ yourself.
According to the IRS, self-employed people can allocate 50 percent of their self-employment tax to Social Security using any acceptable manner.
An appropriate method, according to the guidelines for Schedule SE, is one in which the division of amounts is proportional to the number of days in each period.
For example, you can set aside 22.5 percent of an individual’s annual earnings from January 1, 2020, to March 26, 2020, and 77.5 percent of an individual’s annual earnings from March 27, 2020, to December 31, 2020.
Assume your 2020 net self-employment earnings are $100,000.
They can fund the deferral period with $77,500 (77.5 percent x $100,000). (March 26, 2020 to December 31, 2020).
Only 92.35 percent of your earnings as a self-employed person are liable to social security tax.
As a result, you’d owe $71,571.21 in taxes ($77,500 x 0.9235).
In addition, you must pay a 12.4% social security tax on your wages.
You will only pay half of the 12.4 percent (or 6.2 percent) social security tax on your net earnings because you can defer 50% of your social security component.
As a result, your maximum deferral amount is $4,437.41 ($71,571.21 x 0.062).
Penalty for Late Payments
The IRS made it plain that any late payment of either installment will cause a late payment penalty for the whole deferral.
An employer, for example, defers $50,000 and deposits $25,000 on December 31, 2021, but does not make the second payment until December 31, 2022.
On the total $50,000, the employer is liable for a Section 6656 penalty.
Because the penalty for failing to immediately deposit payroll taxes paid more than 15 days after the due date is 10% of the amount payable under Section 6656.
This would cause a 10% penalty on the total delay, even if they must have paid the first installment.
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