The Coronavirus Aid, Relief, and Economic Security (CARES) Act section 2302(a)(2) set out conditions that allowed for the deferral of the employer portion of the social security tax incurred between March 27, 2020 through Dec. 31, 2020. The amount that otherwise would have been due for this period was delayed to Dec. 31, 2021 and Dec. 31, 2022. This extended tax due date acted as an interest-free loan for businesses during the pandemic to help increase liquidity during this period. Many organizations deferred a portion of their payroll taxes under this provision and as the first 50% comes due, taxpayers should be aware of these important payment dates.
Because both Dec. 31, 2021 and Dec. 31, 2022 are observed as either a holiday or weekend (followed by two more days of weekend or holidays in the District of Columbia), the IRS Office of Chief Counsel has published a memo (PTMA-2021-07) indicating that the deferred FICA tax is due on Jan. 3, 2022 and Jan. 3, 2023 respectively. Thus, employers must pay 50% of their deferred payroll tax liability by Jan. 3, 2022 and the remaining 50% of it by Jan. 3, 2023.
The memo noted above points out that failure to pay the taxes timely creates a penalty on the entire deferred tax liability, not just the 50% due on that particular date. The penalty is 10% of the underpayment if the failure to pay is more than 15 days late and could jump as high as 15% if the tax is not paid 10 days after receiving notice from the IRS for being late.
Example: If an employer has deferred $50,000 in payroll taxes during the eligible period, $25,000 would be due Jan. 3, 2022. The remainder would be due on or before Jan. 3, 2023. If the employer decides to pay $35,000 of the deferral earlier in 2021 then they would only have to pay the remaining $15,000 balance by Jan. 3, 2023. If, on the other hand, the employer pays less than the $25,000 due by Jan. 3, 2022, penalties will apply on the full $50,000.
Accounting method planning
While the payroll tax deferral under the CARES Act is a fixed liability for an accrual-basis taxpayer as of Dec. 31, 2020, the deferral does not meet all tests for deductibility under section 461 until economic performance with respect to the liability occurs. For taxes, economic performance for the liability to pay a tax occurs as the tax is paid to the governmental authority that imposed the tax.
As provided above, the required tax payment date for the 2021 payment is Jan. 3, 2022 and the required tax payment date for the 2022 payment is Jan. 3, 2023.
Reg. section 31.6302-1(h)(9) provides, in part, that an amount remitted by electronic funds transfer will be deemed paid at the time deemed deposited under paragraph (h)(8). Paragraph (h)(8) provides that the amount is deemed deposited when the amount is withdrawn from the taxpayer’s account. Accordingly, it appears that the liability for deferred payroll taxes is deductible in the year electronic funds transfer payment is withdrawn from the employer’s account.
Many payment liabilities, including FICA taxes, are eligible for the recurring item exception treatment for economic performance. Under the recurring item exception, a liability is treated as incurred for a taxpayer year if generally–
(a) At the end of that taxable year, all events have occurred that establish the fact of the liability and the amount of the liability can be determined with reasonable accuracy; and
(b) Economic performance with respect to the liability occurs on or before the earlier of –
a. The date the taxpayer files a timely (including extensions) return for that taxable year; or
b. The 15th day of the ninth calendar month after the close of that taxable year.
However, for the deferred FICA amounts, as the fact of the liability of the deferred payroll taxes was established as of Dec. 31, 2020 (for a calendar year taxpayer), payment of these amounts at the prescribed deferred FICA repayment times discussed above would fail the recurring item exception as the payment date is more than eight and a half months after the end of the taxable year in which the fact of the liability becomes fixed. Accordingly, the liability for deferred payroll taxes is deductible in the year of payment (or deemed payment).
The IRS has been sending notice CP256V to taxpayers that deferred payroll taxes reminding them of the upcoming deadline. Further information is on this IRS website. Taxpayers should note that the amount shown as due for Dec. 31, 2021 is not always 50% of the deferred amount so you should carefully review the notice before making payments to ensure the correct amount is paid and consult with tax advisors when necessary.
Employers should understand the amount of payroll taxes deferred in 2020 and analyze for optimal payment dates to the extent it may be more beneficial to have a deduction in one tax year versus another. For example, a high-income S corporation may wish to pay these taxes on the Jan. 3, 2022 due date to place a deduction in 2022 versus 2021.
It is also important to note that many organizations that deferred payroll taxes under the CARES Act may have also filed one or more amended Forms 941-X to claim the Employee Retention Credit for prior quarters. Even though many organizations are still waiting for these refunds to be issued, the IRS is not offsetting these refunds with the deferred payroll tax balance due; thus, employers should not assume that pending refunds will negate the need to make a deposit by Jan. 3, 2022.
Instructions for making the payment can be found in our earlier article.