With the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress authorized a deferral of certain federal payroll and self-employment taxes incurred between March 27 and December 31, 2020. The period of deferral is soon coming to an end, and taxpayers may face significant penalties if payment deadlines are not met in full. Those who deferred payments in 2020 have until December 31, 2021, and the remainder by December 31, 2022. (Due to these dates falling on a weekend, the IRS confirmed the deadlines are actually January 3, 2022, and January 3, 2023.)

Earlier in 2021, the Chief Counsel office released Memo PTMA-2021-07 addressing the treatment of penalties for failure to deposit taxes deferred by the CARES Act if the payments aren’t made by the deadline. Failure to make timely payments according to this schedule will result in penalties applied to the entire deferred amount, not just the unpaid portion. The penalty for underpayment is 10% of the deferred amount if the payment is more than 15 days late, rising to 15% if the tax is not paid within 10 days from when the first delinquency notice was issued.

Suppose an employer who deferred $50,000 of tax payments from 2020 only pays $20,000 by January 3, 2022, rather than the full $25,000 owed. That employer will be charged a penalty of $5,000 (10% of the full amount deferred), not $500 (10% of the unpaid portion). Also, since the initial 50% installment wasn’t paid in full timely, the entire deferral is invalid and is due immediately. Then if the IRS sends an underpayment notice on February 6, 2022, and the remaining $5,000 is not paid by February 16, the penalty rises to $7,500. The same penalties hold for the second round of repayment. Even if the full 50% payment was made by January 3, 2022, any underpayment of the remaining $25,000 due by January 3, 2023, will result in a penalty levied on the entire $50,000 deferral.

These penalties do not apply: (1) if failure is due to reasonable cause and not willful neglect; (2) to certain first-time depositors; and (3) to the extent that a failure to deposit any or all of the tax was due to the taxpayer anticipating refundable credits allowed under COVID-relief provisions.

Payments can be made through the Electronic Federal Tax Payment System, by credit or debit card, or with a money order or check. The IRS has provided the following  guidance to ensure that payments are properly acknowledged:

• Deferral payments should be made separately from other tax payments to ensure that they are applied to the deferred balance on the applicable quarter for tax year 2020 (IRS systems won’t recognize the payment for deferred tax if it is combined with other tax payments).
• These payments should be designated the as “deferred Social Security tax” to ensure that it is properly processed as a deferral payment.

Employers should plan accordingly to make sure these repayments are submitted in full in a timely manner. Our state and local tax (SALT) professionals are available to assist if you have questions about this repayment.  Please contact our SALT Team at SALT@GMCO.com.