Learn the ins and outs of the recent COVID-19 tax relief measures and how it may impact you and your company’s deferred payroll taxes.
In 2020, the government rolled out several COVID-19 relief measures, including Economic Impact Payments and several forms of tax relief. One particular option that has received little love from businesses, tax advisors, and political commentators alike has been the option to defer employee payroll taxes until 2021, with the caveat that all employee-deferred taxes are to be paid back early this year.
Just a few weeks into 2021, the IRS has issued a statement pursuant to the COVID Tax Relief Act of 2020 stating that the deadline on these deferred payroll taxes has been extended. Several other forms of tax relief have also been extended into the new year.
Many government employees and workers who have opted to defer their portion of payroll taxes last year would otherwise have had to have a larger portion of their wages withheld in the first few months of the year to pay back what they deferred. With this newest statement, that deadline has been extended until the end of the year.
Navigating the changes made to tax and economic relief options last year can be challenging, so let’s walk through them step-by-step.
When Were Payroll Taxes Deferred?
Payroll taxes were nominally deferred in two separate occasions – first, earlier in 2020, the CARES Act allowed employers to defer their portion of the payroll tax (half of the 6.2 percent per employee wage used to pay for Social Security and certain railroad retirement taxes) for the rest of the calendar year (from March through December 2020), with two separate deadlines for paying back deferred taxes. These are:
- December 31, 2021 for the first half of deferred payroll taxes
- December 31, 2022 for the second half of deferred payroll taxes. These deadlines have not changed yet.
Then, later in August 2020, a Presidential Memorandum issued by President Trump to the Secretary of the Treasury urged him to provide a similar option to employees to defer their half of the payroll tax for the remaining months of 2020 (September through December), with the caveat that these taxes would be additionally withheld from wages in the first quarter of 2021. Failure to completely pay back all deferred taxes by April 30, 2021 would lead to the accruement of penalties and interest starting May 1, 2021.
This option was seen as less favorable, as the individual financial impact made by deferring these taxes would be generally minimal, whereas the additional strain on the employee’s wages in 2021 would be a larger issue for most. Other questions surrounding the deferral of employee taxes included liability (if the employee were to quit/leave before the new year). It was also only available to workers who earned less than $4000 on a biweekly basis.
However, recent changes made through the Consolidated Appropriations Act at the end of 2020 have extended that original deadline to give employers charged with withholding their employees taxes more time to accumulate the deferred amount.
When Are Deferred Payroll Taxes Now Due?
Instead of being due from the period of January 2021 to April 2021, all deferred payroll taxes are now due December 31, 2021. All associated penalties, interest, and additional payments on unpaid amounts would begin to accrue on January 1, 2022.
This means that instead of being made to pay back all deferred payroll taxes in the first quarter of the year, employees whose portion of the payroll tax was deferred by their employers now have until the end of the year to accumulate the deferred amount through additional withholding.
Employees are required to accrue the total applicable taxes ratably through “wages and compensation” between January 1, 2021, and December 31, 2021. They can alternatively “make arrangements to otherwise collect the applicable taxes” from their employers.
What If Deferred Payroll Taxes Aren’t Paid?
If the deferred payroll taxes aren’t paid, then the IRS can charge the affected taxpayer additional penalties and interest. Failure-to-pay penalties for taxes owed to the government start at 0.5 percent of the total debt per month, up to 25 percent.
Additional interest is based on the federal short-term rate, plus three percentage points. Should your debt continue to grow, the IRS can pursue collection actions against you.
What About Other COVID Tax Relief?
Employers were granted other forms of payroll tax relief throughout the year to help reduce the financial and personal impact of the coronavirus, as well as combat the rising unemployment numbers throughout the country.
The New Employer Tax Credits included two different credits for eligible employers looking for relief – the Credit for Sick and Family Leave, as well as the Employee Retention Credit. Both have been extended to a degree in the new year.
Credit for Sick and Family Leave
The Credit for Sick and Family Leave was provided to small and mid-sized businesses under the Family First Coronavirus Response Act, and helps employers finance a mandatory sick leave period provided to affected employees who have had to call in sick due to COVID, had to care for someone who was sick, or had to care for their children due to school and daycare closures in 2020.
This paid sick period was mandated to be a minimum of ten days at the employee’s regular rate of pay, up to $511 per day (maximum of $200 a day if the employee was caring for someone else, or their children)
An update late in 2020 extended the tax credit until March 2021, but did not extend the mandatory sick leave period, meaning only employers who do decide to continue to provide sick leave can avail of an additional tax credit in 2021 under the FFCRA. The qualifications and caps haven’t been altered either.
Employee Retention Credit
The Employee Retention Credit was a refundable tax credit of up to 50 percent of at most $10,000 in qualifying annual wages per employee (maximum of $5,000 per employee) paid between March 13, 2020 and December 31, 2020. This tax credit is only available to businesses that have been partially or fully affected by government-mandated lockdowns caused by COVID-19 or have quarterly gross receipts that are less than 50 percent of what they were for the same quarter in 2019.
The Taxpayer Certainty and Disaster Relief Act of 2020 further extended the eligibility period through to June 30, 2021 and amended the tax credit to apply to up to 70 percent of at most $10,000 per employee per calendar year. Additionally, businesses with a decline in gross receipts in the first quarter of 2021, wherein their gross receipts are less than 80 percent of what they were in the first quarter of 2019, are also eligible.
If you have been personally affected by the COVID tax relief efforts and have further questions about how your requirements and/or deadlines have changed, consider getting in touch with our tax professionals at Rush Tax for an in-depth and individualized look at your coronavirus tax relief. Rush can also work with you on cases of tax debt and debt resolution, and help you negotiate with the IRS.