What to Know About the Payroll Tax Deferral

In response to economic disruptions in 2020, the federal government introduced temporary measures allowing for the deferral of certain payroll taxes. This initiative was designed to provide businesses and their employees with increased cash flow by postponing tax payments. The deferral was not a forgiveness of tax liability but a structured delay, and all associated repayment deadlines have since passed.

Two separate programs were established, one targeting the employer’s share of payroll taxes and another focusing on the employee’s share. Each program had its own set of rules and timeframes, creating subsequent repayment obligations.

Employer Payroll Tax Deferral

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided an option for employers to defer their share of Social Security taxes. This applied to the 6.2% tax employers pay on employee wages up to the annual Social Security wage base. The deferral was available for wages paid between March 27, 2020, and December 31, 2020, and was available to most employers without a requirement to demonstrate a specific financial impact.

Participation in this deferral was automatic for eligible employers, meaning no special application was needed. Initially, employers who received a loan under the Paycheck Protection Program (PPP) faced restrictions on using this deferral, but subsequent legislation removed this limitation, allowing all employers to participate.

Self-employed individuals were also permitted to defer one-half of the Social Security tax due on their net earnings from self-employment for the same period. The deferral did not apply to the Medicare portion of payroll taxes for either employers or employees, nor did it apply to the employee’s share of Social Security tax under this program.

Employee Payroll Tax Deferral

A separate payroll tax deferral was also created for employees through a Presidential Memorandum. This program allowed for the postponement of the employee’s 6.2% share of Social Security taxes for wages paid from September 1, 2020, through December 31, 2020. Unlike the employer deferral, this program had specific eligibility requirements for employees based on their income.

To have been eligible, an employee’s bi-weekly, pre-tax wages generally had to be less than $4,000, or an equivalent amount for other pay periods. This threshold was determined on a per-pay-period basis, meaning an employee could be eligible in one pay period but not another if their wages fluctuated.

Employer participation in this program was optional, as they were not required to offer the deferral. For employees at participating companies, it resulted in a temporary increase in take-home pay because the 6.2% Social Security tax was not withheld from their checks during the deferral period.

Repayment Obligations for Deferred Taxes

The deferral of payroll taxes provided temporary financial relief but was not a tax forgiveness program. All deferred amounts were required to be repaid to the IRS, and failure to meet the now-passed deadlines resulted in the assessment of penalties and interest.

For the employer portion of Social Security taxes deferred under the CARES Act, the repayment was structured in two installments. The first 50% of the deferred amount was due by January 3, 2022, and the remaining 50% was due by January 3, 2023.

Repayment of the employee’s deferred Social Security tax was handled differently. Employers who participated in the program were responsible for collecting the deferred taxes from their employees. This was done by withholding additional taxes from employee wages paid between January 1, 2021, and December 31, 2021, a period extended by the Consolidated Appropriations Act of 2021.

Employers were ultimately liable for remitting the collected employee taxes to the IRS. If an employee left the company before the full deferred amount was collected, the employer was permitted to make arrangements to collect the remainder from the employee. Interest and penalties began to accrue on any unpaid balances after December 31, 2021.

Reporting Deferrals and Repayments on Form 941

Employers were required to report their payroll tax deferrals on their quarterly federal tax return, Form 941. The IRS revised this form to accommodate the reporting of these transactions under both the employer and employee programs.

The deferred amount of the employer’s share of Social Security tax was reported on Line 13b of the revised Form 941.

For the employee tax deferral, the deferred amount of the employee’s share of Social Security tax was included on Line 13b and then separately detailed on Line 24. When these deferred taxes were later paid, employers accounted for these payments on subsequent Form 941 filings. If an error was made, an employer would file Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to make corrections.