I’m Tara Fisher, CPA. The IRS recently issued guidance for self-employed individuals regarding the payment of employment taxes that were deferred under the 2020 CARES Act. The agency has also provided instructions for individuals who cannot pay the full amount by the specified due date. In this article, I’ll walk through important caveats of the newly published tax payment guidance. Let’s get started!
CARES Act: What is it?
The CARES (Coronavirus Aid, Relief, and Economic Security) Act allows self-employed individuals to defer the payment of certain Social Security taxes on Form 1040 for tax year 2020 over the next two years. Half of the deferred Social Security tax is due by December 31, 2021, and the remainder is due by December 31, 2022.
CARES payment guidance
The IRS has specified that individuals can pay the deferred amount any time on or before the due date. The instructions state that taxpayers can make tax payments through the Electronic Federal Tax Payment System (EFTPS) or by credit card, debit card, money order or check.
The instructions state that individuals should separate these payments from other tax payments to help ensure such payments are applied to the deferred tax balance on the tax year 2020 Form 1040.
This is important because the IRS systems won't recognize the payment for deferred tax if it is combined with other tax payments or paid with the current Form 1040.
Further, taxpayers remitting payment by mail should designate the federal tax payment as "deferred Social Security tax." Individuals making the deferred Social Security tax payments through the EFTPS should select "1040 US Individual Income Tax Returns" and "deferred Social Security tax" to properly identify the type of payment.
Note that the IRS websites for payment by credit card or debit card do not provide specifications for identifying the payment as related to the 2020 Form 1040.
If a taxpayer cannot pay the full deferred IRS tax payment by the specified due date, they should remit the maximum amount they are able to pay to limit penalty and interest charges. When the installment amount is not paid in full, the IRS sends the taxpayer a notice of the balance due. Individuals should follow the instructions on the notice to make a payment or apply for a payment plan.
Additional information on deferred Social Security tax payments are available on the “Paying Your Taxes” page of the IRS website. On this page, taxpayers can gather additional information regarding online tax payment methods, payment plans, and their individual tax accounts.
The IRS has also dedicated a section of their website to FAQs on the deferral and payment of employment taxes. The recently added questions pertaining to self-employed individuals have been included below for your convenience. You can view the full question list here.
IRS Cares FAQs
Will the IRS issue reminder notices to taxpayers reflecting the total amount of deferred taxes and the tax payment due dates? (added July 30, 2020)
The IRS intends to issue a reminder notice to employers before each applicable due date. Because each return period is treated separately for purposes of determining the amount of tax due for the period, Form 941 filers that deferred in all four quarters of 2020 may receive four reminder notices stating the deferred amounts that are due on the applicable dates in 2021 and 2022, even though the amounts for all four quarters will have the same due dates of December 31, 2021 and December 31, 2022.
Are self-employed individuals eligible to defer payment of self-employment tax imposed on net earnings from self-employment income?
Yes. Self-employed individuals may defer the payment of 50 percent of the Social Security tax imposed under section 1401(a) of the Internal Revenue Code on net earnings from self-employment income for the period beginning on March 27, 2020 and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the "payroll tax deferral period.") Self-employed individuals determine their net income from self-employment and deductions based on their method of accounting. Most self-employed individuals use the cash method of accounting and will therefore include all income actually or constructively received during the period and all deductions actually paid during the period when determining their net income from self-employment.
Is there a penalty for failure to make estimated tax payments for 50 percent of Social Security tax on net earnings from self-employment for the payroll tax deferral period?
No. For any taxable year that includes any part of the payroll tax deferral period, 50 percent of the Social Security tax imposed on net earnings from self-employment attributable to the payroll tax deferral is not used to calculate the installments of estimated tax due under section 6654 of the Internal Revenue Code. This means that self-employed individuals that defer payment of 50 percent of Social Security tax on their net earnings from self-employment attributable to the period beginning on March 27, 2020, and ending on December 31, 2020, may reduce their estimated tax payments by 50 percent of the Social Security tax due for that period.
What are the applicable dates when deferred payment amounts of 50 percent of the Social Security tax imposed on self-employment income must be paid?
The deferred tax payment amounts must be paid by the "applicable dates" as described in What are the applicable dates by which deferred deposits of the employer's share of Social Security tax must be deposited to be treated as timely (and avoid a failure to deposit penalty)? (FAQ 18)
How can a self-employed individual determine 50 percent of the Social Security portion of self-employment tax attributable to net earnings from self-employment earned during March 27, 2020 through December 31, 2020? (added July 30, 2020)
Self-employed individuals may use any reasonable method to allocate 50 percent of the Social Security portion of self-employment tax attributable to net earnings from self-employment earned during March 27, 2020, through December 31, 2020. For example, an individual may allocate 22.5% of the individual's annual earnings from self-employment to the period from January 1, 2020, through March 26, 2020, and 77.5% of the individual's annual earnings to the period from March 27, 2020, through December 31, 2020. Similarly, an individual may use any reasonable method in applying the Social Security wage base or taking into account partnership income in determining the portion of 50 percent of the Social Security portion of self-employment tax attributable to net earnings from self-employment for the period from March 27, 2020, through December 31, 2020.
Whether you’re preparing your own self-employment taxes or your client’s, this guidance will help clarify the deferred tax payment process and other important stipulations of this act.
Keep reading the Becker blog for more important updates that all accountants should be in-the-know of.
The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.
Tara Fisher has been practicing tax for over 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.
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