The pandemic resulted in certain tax deferral options last year for both employers and employees.
These included deferrals for the employee and employer share of Social Security taxes.
While the deferrals were meant to free up cash last year during the worst of the pandemic, the payments start coming due this year and employers should plan accordingly, experts say.
"If you took advantage of the deferral opportunities in 2020, 2021 is the time to start paying up," says Barbara Weltman, a Vero Beach, Florida-based small business tax specialist and author of J.K. Lasser’s Small Business Taxes 2021.
One option under an executive order from then-President Donald Trump allowed employers to defer withholding the 6.2% employee portion of Social Security tax payments from Sept. 1, through Dec. 31, 2020 for employees making under $4,000 per biweekly pay period (under $104,000 annually), she says.
But Trump signed that executive order rather late — last August — and most private employers opted not taking the deferral for employees, Weltman says. (IRS data on how many did was unavailable at this time.)
Among issues giving employers pause was that while employees would get a break in 2020, they’d get hit with a double deduction of those taxes from their paychecks when repayment was due, which originally was to have been Jan. 1 through April 30, 2021.
The repayment period has since been extended to Dec. 31, Weltman says.
Another concern was how to recoup repayment from employees if they left the firm, voluntarily or otherwise, says Joseph Molloy, a tax partner at Anchin Accountants and Advisors in Uniondale.
"What happens if you lay these people off? You can’t control their withholding anymore and you’re required to somehow get it from them," he says. Few private employers chose the deferral option, Molloy says. Those who did must make sure they’re collecting repayment from employee paychecks now through the end of the year. (Due to the New Year's holiday, payments made by Jan. 3. 2022, will be considered timely.)
Deadlines for employer share
Employees can check with their organization's payroll office for details on the collection schedule for budgeting purposes, he says.
Separately, there was also an option to defer payment of the employer’s matching 6.2% portion of Social Security taxes from March 27, 2020 through Dec. 31, 2020, Weltman says. Under that scenario, 50% of the deferred amount is due by Dec. 31, 2021 and 50% by Dec. 31, 2022, she says.
According to Susan Accardo, Vice President at Accu Data Workforce Solutions in Hicksville, which provides payroll outsourcing, only about 5% of her clients took advantage of that employer deferral.
She thinks employers were overwhelmed with so much legislation last year. and COVID problems in general, "they may have opted not to further complicate either situation by deferring payroll taxes."
Most said no thanks
Similarly, Christopher Migliaccio, a senior manager and employee retention credit leader at PKF O’Connor Davies, LLP, which has local offices in Manhattan and Hauppauge, says only a few clients opted for the employer deferral. That's probably because it was only a deferral — not forgiveness — and employers knew they eventually had to pay it back, he says.
Plus, most employers were focused on utilizing Paycheck Protection Program (PPP) loans more than deferrals, says Leo Parmegiani, a tax partner at PKF O’Connor Davies. At least those provided loan forgiveness, he says.
But if an employer did take the Social Security tax deferral they should talk to their CPA/tax adviser on if they qualify for the Employee Retention Tax Credit, which for 2021 allows employers to offset up to $28,000 per retained full-time equivalent employee against federal payroll taxes, Migliaccio said. That's $7,000 per quarter depending upon certain qualifying factors — but in the third and fourth quarter, the credit would go to offset the Medicare tax instead of Social Security.
That credit was available last year as well (it was up to $5,000 for each employee retained from March 13, 2020, to Dec. 31, 2020) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended it through June 30, 2021. It can still be sought retroactively. For qualifying criteria, see https://tinyurl.com/4smc8t33. Employers that benefit from that credit could use those funds to pay for the Social Security tax deferral, Parmegiani says.
In any event, employers need to understand the outstanding liability that’s due and make a schedule to set aside money in preparation for repayment, Accardo says. One suggestion is to set up a new bank account dedicated to repayment and fund it based upon cash flow each week, she says.
For those that took deferrals, utilizing the Employee Retention Tax Credit (ERTC), which offers substantial tax relief on wages, can help. But more awareness is needed. Fifty-two percent of small business owners in a recent National Federation of Independent Business survey said they weren’t familiar with the ERTC, and only 2% have taken advantage of it on 2021 wages.
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