What is Section 2302 of the CARES Act?

Section 2302 of the CARES Act, enacted in March 2020, allowed businesses and self-employed individuals to defer payment of the employer’s share of Social Security taxes. This measure was designed as a temporary delay to help with cash flow during the COVID-19 pandemic, not as a permanent forgiveness of the tax liability. Those who used this relief were required to meet subsequent repayment obligations mandated by the law.

Understanding the Employer Tax Deferral

Section 2302 permitted employers to postpone paying their 6.2% share of Social Security taxes for wages paid during the “payroll tax deferral period,” which began on March 27, 2020, and concluded on December 31, 2020. Businesses using this option reduced their payroll tax deposits during this timeframe, retaining the capital for other operational needs. The deferred amounts were tracked and reported to the Internal Revenue Service (IRS) on Form 941, the Employer’s QUARTERLY Federal Tax Return.

Initially, employers who had a Paycheck Protection Program (PPP) loan forgiven were prevented from also deferring these payroll taxes. This created a difficult choice for many businesses. However, this limitation was retroactively eliminated by the Paycheck Protection Program Flexibility Act, allowing employers to benefit from both PPP loan forgiveness and the payroll tax deferral.

The deferral applied only to the employer’s portion of the Social Security tax. It did not extend to the employee’s share of Social Security and Medicare taxes, nor did it cover the employer’s share of Medicare tax. Employers were still required to withhold these other amounts from employee paychecks and remit them to the IRS according to their regular deposit schedule.

Repayment Obligations and Deadlines

The CARES Act established a two-part repayment schedule for the total amount of Social Security taxes deferred in 2020. The deferred liability was split into two equal installments, providing a predictable timeline for repayment.

The first deadline required that 50% of the total deferred amount be repaid by December 31, 2021. Because this date fell on a holiday, the effective due date was extended to the next business day, January 3, 2022. This payment covered half of the aggregate taxes deferred in 2020.

The second and final installment for the remaining 50% of the deferred taxes was due by December 31, 2022, which was also extended to the next business day, January 3, 2023. Meeting these two deadlines was necessary to comply with the deferral terms and avoid penalties. The IRS sent reminder notices to employers ahead of these dates, outlining the total deferred amount and the upcoming payment obligation.

How to Make Repayments

The IRS designated the Electronic Federal Tax Payment System (EFTPS) as the primary method for remitting the deferred Social Security tax payments. This online system is the standard for most federal tax payments. Using EFTPS ensured that the repayments were correctly credited against the specific deferred tax liability from 2020.

To make a payment correctly through EFTPS, an employer had to select the appropriate tax form, which is Form 941. A key step was to then select the calendar quarter in 2020 to which the payment should be applied. This ensured the payment was not mistaken for a regular, current-period tax deposit.

Employers could make these payments at any point before the respective deadlines, allowing for flexibility. While EFTPS was the recommended method, payments could also be made by credit card, debit card, or a physical check or money order. For these methods, it was important to clearly designate the payment for the deferred Social Security tax and specify the relevant 2020 tax period to prevent misapplication by the IRS.

Consequences of Non-Payment

Failing to meet the repayment deadlines set by the CARES Act carried financial consequences. If an employer did not pay each installment in full by its due date, the IRS treated the unpaid portion as a delinquent tax liability. This amount became subject to standard penalties and interest charges that began to accrue from the repayment due date.

The primary penalty is the failure-to-pay penalty, which is calculated on the unpaid tax amount and continues to grow until the liability is paid in full. In addition, interest is charged on both the underlying unpaid tax and the accrued penalties. The interest rate is determined quarterly by the IRS and compounds daily.

If any portion of a repayment installment was late, the failure-to-deposit penalty could be assessed on the entire deferred amount, not just the unpaid half. The IRS issued various notices to taxpayers with outstanding balances, including notices to inform them of a misapplied payment that did not correctly reduce their deferred liability.

Special Considerations for Self-Employed Individuals

The tax deferral opportunity was not limited to employers. Self-employed individuals were also eligible for a similar benefit, allowing them to manage their cash flow. They could defer 50% of the Social Security portion of their self-employment (SE) tax, which is equivalent to 6.2% of their net earnings from self-employment.

The deferral period for self-employed individuals mirrored that for employers, covering net earnings from March 27, 2020, through December 31, 2020. The deferral was calculated and claimed on Form 1040, specifically on Schedule SE (Self-Employment Tax) and Schedule 3 (Additional Credits and Payments).

The repayment schedule for self-employed individuals was identical to the one for employers. The first 50% of their deferred SE tax was due by December 31, 2021, and the remaining 50% was due by December 31, 2022. These repayments were typically made through regular quarterly estimated tax payments or included with their annual Form 1040 tax payment.