As the year winds down, employers should note the following important end-of-year deadlines that relate to COVID-19 payroll relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent legislation and guidance.
Federal Insurance Contributions Act (FICA) taxes apply to each employee’s calendar year FICA wages and include the employee and employer portion of Social Security taxes (6.2% on FICA wages up to that year’s FICA wage base), the employee and employer portion of Medicare taxes (1.45% on all FICA wages), and the employee 0.9% additional Medicare tax on FICA wages exceeding $200,000. The employer must withhold the employee portions and then deposit all employment taxes (both the employee and employer FICA taxes along with withheld federal income taxes) with the IRS in accordance with the employer's payroll deposit schedule or other special deposit timing rules.
In 2020, the CARES Act permitted employers to elect to defer the deposit due dates for the employer 6.2% Social Security taxes otherwise due between March 27, 2020, and Dec. 31, 2020. If an employer elected to defer the deposit dates for its Social Security taxes due during this time frame, half of the deferred amount of such taxes has a new deposit due date of Dec. 31, 2021, and the other half has a new deposit due date of Dec. 31, 2022.
The first deferred deposit deadline of Dec. 31, 2021, is approaching. This is a strict deadline. The IRS chief counsel has advised its enforcement office that failure to meet the deadline will invalidate the entire deferral and result in a failure-to-deposit penalty of at least 10% on the entire amount deferred (not just on the portion paid late). This penalty increases to 15% if the IRS sends the taxpayer a notice demanding payment and that notice is not complied with. Additionally, interest on the failure-to-deposit penalty amount can apply, as can other potential penalties.
For example, if the entire amount an employer properly deferred was $60,000, failure to timely pay any portion of the $30,000 due on or before Dec. 31, 2021, results in a failure-to-deposit penalty on the entire $60,000 deferral. This is the case even if the balance due on Dec. 31, 2022, is timely paid.
The Infrastructure Investments and Jobs Act (signed into law on Nov. 15, 2021) includes a retroactive repeal of the employee retention payroll tax credit (ERC). The ERC is not available for the fourth calendar quarter of 2021 (which began on Oct. 31) other than for a recovery startup business. Read an earlier article for more information on the early end to the ERC.
Employers that anticipated fourth calendar quarter 2021 ERC eligibility and that now are not eligible might have either requested an advance payment of the ERC from the IRS or offset payroll deposits based on the anticipated credit. The IRS issued Notice 2021-65 to provide the following guidance to affected employers:
Correcting advance payments
Affected employers that requested and received advance payments for wages paid in the fourth calendar quarter of 2021 must repay the amount of the advance by the due date of the applicable employment tax return that includes the fourth calendar quarter 2021. Failure to timely repay the advance may result in failure-to-pay penalties under IRC Section 6651.
Correcting payroll offsets
Affected employers that reduced deposits of some or all employment taxes by the amount of the anticipated ERC for the fourth calendar quarter 2021 should be aware that the IRS no longer will waive failure-to-deposit penalties for these amounts. For deposits of such amounts due on or before Dec. 20, 2021, the failure-to-deposit penalty can be avoided if all the following apply:
Notice 2021-65 refers employers to the relevant IRS form or schedule instructions.
Employers that deferred deposits of the employer 6.2% Social Security tax should not miss the Dec. 31, 2021, deposit deadline for half of the deferred amount. As noted, the IRS chief counsel has advised its enforcement office to impose a failure-to-deposit penalty on the entire deferral if any portion is late. Additionally, interest and other penalties could apply.
Employers affected by the repeal of the ERC for the fourth calendar quarter of 2021 should follow the IRS guidance and related deadlines as well as the related instructions to IRS forms (Form 941, “Employer’s Quarterly Federal Tax Return,” for most employers) and schedules.
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