The 2020 CARES Act allowed CVD some payroll and self-employment (SE) fees following the COVID-19 crisis. On Aug. 8, 2020, President Trump signed an executive order to authorize deferred by employers affected by COVID-19.
The employees could defer the deposit and payment of their share of the social security tax on employee wages. Self-employed were allowed to defer SE taxes. In this post, we look at how your company should prepare as the payment date draws near.
What does the tax deferred mean?
In the order, the President gave employees the authority to defer withholding, deposit, and payment of employees’ share of Social Security tax. The deferred applies to employees who take home less than $ 104 000 who qualify for deferred. And that applies to wages earned between Sept. 1, 2020, and Dec. 31, 2021.
It’s important to note that the deferrals are not waivers, which means the tax is payable later. The first half of the deferred is due on Dec. 31, 2021, while the other half is payable on Dec. 31, 2022.
What is the impact of tax deferred?
The impact of the payroll tax deferred is that employees went home with a higher paycheck in the last quarter of 2020. However, that also means that in the last quarter of 2021, employees will feel the pinch of higher taxation.
For employers, they have to deal with adjusted payroll as they take into consideration the deferral. Here is what you need to know.
- The deferred is not a tax waiver.
- If your earnings are more than the social security wage limit, you are exempt from the deferral. The deferral applies to those who earn $104,000 or less.
- The order covers only the social security tax. It doesn’t apply to any other fees.
- Under the 2020 CARES Act, eligible employers are allowed to defer the social security tax.
What is the due date for the deferred fees?
The due date for the fees, which were due from May to December 2020, is as follows.
- Pay the first installment of 50% of the taxes you owe by Dec. 31, 2021.
- The second and final installment is due on Dec. 31, 2022.
How to prepare for payment of the deferred taxes
Know how much you owe
The first step is to tabulate and know how much you owe. It’s essential to do this at a good time to avoid surprises. The deferred payment will mean you pay more taxes, and you need to prepare financially.
If you opted for deferred, it means you are taking home more money. However, because the deferral does not translate to a waiver, you need to budget for it. Start by reducing expenses so that you can save enough for when you pay the tax.
Don’t wait until the last minute.
Avoid the last-minute rush and pay the deferred tax early enough. That allows time to correct any errors before the due date.
Inform the employees of the deferred tax payment dates
Employees may forget the date with the IRS for the deferral of taxes. It’s essential to communicate the intended withholding, payment, and depositing of the tax. That will reduce the number of payroll queries and complaints.
As we wrap up the year, the due date for the payment of taxes deferred in 2020 is fast approaching. If you have any tax deferred on the payroll that you plan on taking in 2021, be sure to have a conversation with your bookkeeper so they can guide you on how much you need to pay. Our team of highly experienced bookkeeper is here to help you prepare for the payment and depositing of the deferred taxes.