The COVID-19 pandemic, which ravaged the planet in 2020, put the world to the test on many fronts, including the employment situation. The worst was faced by the working class including independent contractors, freelancers, and small- to medium-sized business owners.
Social Security tax was at that time the main concern for small businesses and self-employed individuals.
Fortunately, the IRS permitted qualified employees and self-employed people to temporarily defer paying Social Security tax as a form of relief during the pandemic.
However, now the moment has come for people to collect and remit the deferred tax, either on their own or through their employment.
In today’s guide, we have thoroughly explained the self-employment tax deferral and associated concepts. Let’s have a look at what we’ll cover ahead:
- Understanding Self-Employment Tax Deferral
- Understanding Maximum Deferral
- Understanding Maximum Deferral of Self-Employment Tax Payments
- Self-Employment Individuals and Social Security Tax Deferral
- Example of Self-employed Social Security Tax Deferral
- How to Pay back the Self-Employed Social Security Tax Deferral?
- Frequently Asked Questions (FAQs) on Self-Employed Deferral of Social Security Tax
- How Deskera Can Assist You?
Let’s Start!
Understanding Self-Employment Tax Deferral
The CARES Act allowed employers—including those who are self-employed—to temporarily defer paying Social Security (SS) tax.
By executive order and the Consolidated Appropriations Act, an SS tax deferral for employees was also established, and the employee portion's deferred payback timeline was extended. The CARES Act's employee deferral, however, has a shorter repayment time than the employer/self-employed deferral.
The time period for deferring Social Security taxes for both employers and employees has passed.
Any employer or employee social security taxes that you deferred must be repaid immediately.
Understanding Maximum Deferral
Maximum amount of elective deferral To all of your plans (except from 457(b) plans), you may defer up to $20,500 in 2022 ($19,500 in each of the next two years; $19,000 in 2019), including pre-tax and Roth contributions.
Understanding Maximum Deferral of Self-Employment Tax Payments
Between 2021 and 2022, the payment could be spread out in the payment plan.
For instance, if they had the option to defer $6,000 in self-employment taxes but chose to defer only $4,000 of them, they would need to pay $500 by the end of 2021 and the remaining $3,500 by the conclusion of 2022.
Understanding Self-Employment Individuals and Social Security Tax Deferral
A newly passed law allows self-employed individuals to postpone for six months, from March 27, 2020, to December 31, 2020, the payment of 50% of their self-employment tax that is related to Social Security.
It basically means that self-employed people could postpone paying 6.2 percent of their taxable income in Social Security tax during the deferment period (representing 50 percent of their 12.4 percent Social Security tax responsibility).
Self-employed people were unable to defer their Medicare-related self-employment taxes.
Using Form 1040, U.S. Individual Income Tax Return, just the first half of the Social Security tax is due.
Again, for self-employed people, the Social Security tax deferral repayment term is longer. Following is a list of the self-employed (and corporations') 2020 tax deferral repayment schedule:
Any sum over 50% of the maximum deferral amount, if a self-employed person opted to only defer a portion of it, is due in 2021.
In 2022, the remainder 50% is expected. You would only have to pay the extra $1,000 in 2021 and the remaining $3,000 in 2022 ($6,000 / 2) if you were qualified to defer $6,000 but only deferred $4,000 instead.
Example of Self-employed Social Security Tax Deferral
Say your annual taxable income is $60,000. You used the Social Security tax deferral in 2020.
Further, the self-employed deferral is 50% of the Social Security part of self-employment taxes, or 6.2 percent, in case you forgot. You deferred the following amount in 2020:
$60,000 X 0.062 = $3,720
Throughout the year, you were qualified for and deferred paying a total of $3,7200 in Social Security taxes. The first $1,860 is due by December 31, 2021, and the final $1,860 is due by December 31, 2022.
How to Pay back the Self-Employed Social Security Tax Deferral?
The deferred component of Social Security tax can be repaid by individuals on or before the deadlines.
Self-employed people can pay the following in order to pay back the delayed taxes:
- With the use of the Electronic Federal Tax Payment System (EFTPS)
- Using a credit card or debit card
- Through check or money order
Further, employees must also:
- To guarantee that the payments are applied to their deferred balance, make sure they are made separately from other tax payments.
- Indicate on the payment that it is "deferred Social Security tax."
Furthermore, if you decide to use EFTPS, select "1040 US Individual Income Tax Returns" and "deferred Social Security tax" as the payment type. Use the 2020 tax year when making a repayment.
Choose "balance due" as the payment's justification when using the IRS Direct Pay option (which accepts payments through bank accounts).
When paying with a debit or credit card through the Card Program, choose "instalment agreement" and use the 2020 tax year as the tax year.
Frequently Asked Questions (FAQs) on Self-Employed Deferral of Social Security Tax
Following we have discussed some important frequently asked questions (faqs) on self-employed deferral of social security tax and repayment. Let’s check out:
Que 1: Should self-employed people put off paying their taxes?
Ans: It could seem alluring to put off paying some tax now in order to keep more cash in your wallet, but you might want to think twice before making that decision.
You might want to think about keeping that money in reserve while you still have it, and possibly paying it as usual, in a period when changes appear to occur every week. That might assist you in averting a future tax obligation that is higher.
Even if more assistance is provided to small business owners and the self-employed, it could not be enough to pay all future tax obligations. Whatever you decide, keeping meticulous records of your earnings and outgoings will be very useful when it comes time to prepare and submit your estimated quarterly taxes. Most likely, you already do this.
Que 2: Can anyone deposit more than the 50% repayment amount?
Ans: Yes, people may choose to reach more than 50% before the deadline in 2021. You must pay the remaining payment by December 31, 2022, even if you decide to pay more than 50%.
Que 3: What should self - employed individuals do if they are not able to pay a payment on time?
Ans: If a self-employed person is unable to pay the entire deferred tax amount back, they should pay whatever they can by the instalment due dates.
If the money is not paid in full, the IRS will send the individual a balance owing notification. If you receive a notification, follow the instructions to pay and request a payment schedule.
For more information on payment options, go to the IRS's page on paying taxes.
Que 4: What happens if I do opt to defer submitting my taxes?
Ans: It's critical to comprehend which taxes, and how much of each, you can theoretically postpone.
Self-employed individuals are permitted to postpone paying 50% of the Social Security tax required under section 1401(a) of the Internal Revenue Code on net self-employment income for the three-month period beginning on March 27, 2020, and ending on December 31, 2020, according to the IRS.
The payments must still be paid by the deadlines that apply to all firms even if a business selects tax deferral. To avoid fines, you must adhere to the dates and amounts listed below:
- December 31, 2021 (50% of the deferred amount)
- December 31, 2022 (remainder)
Que 5: Where can you obtain additional details about the requirements for self-employed Social Security tax deferral?
Ans: Visit the IRS website or get in touch with them directly if you want to find out more about the requirements for Social Security tax deferral for the self-employed.
Que 6: Will penalties for underpayment result from the self-employment tax deferral?
Ans: No, as long as your clients pay their remaining tax obligations on time each quarter, taking advantage of the self-employment tax deferral won't result in underpayment penalties. However, they risk fines if they don't pay back their awaited taxes on time.
How Deskera Can Assist You?
Deskera has the tools to help you manage your payroll, leaves, employee onboarding process, and managing employee expenses, all in a single system. Easily generate pay slips for your employees and simplify your payroll management with Deskera. It also digitizes and automates HR processes including hiring, expenses, payroll, leave, attendance, and more.
Final Takeaways
We've reached the last section of this guide. Here are some of the most crucial things to keep in mind for your future reference. Let’s take a look:
- The IRS permitted qualified employees and self-employed people to temporarily defer paying Social Security tax as a form of relief during the pandemic.
- The CARES Act allowed employers—including those who are self-employed—to temporarily defer paying Social Security (SS) tax.
- The CARES Act's employee deferral, however, has a shorter repayment time than the employer/self-employed deferral.
- Maximum amount of elective deferral To all of your plans (except from 457(b) plans), you may defer up to $20,500 in 2022 ($19,500 in each of the next two years; $19,000 in 2019), including pre-tax and Roth contributions.
- Self-employed people were unable to defer their Medicare-related self-employment taxes.
- Using Form 1040, U.S. Individual Income Tax Return, just the first half of the Social Security tax is due.
- In 2022, the remainder 50% is expected. You would only have to pay the extra $1,000 in 2021 and the remaining $3,000 in 2022 ($6,000 / 2) if you were qualified to defer $6,000 but only deferred $4,000 instead.
- Self-employed people can pay the following in order to pay back the delayed taxes– with the use of the Electronic Federal Tax Payment System (EFTPS), using a credit card or debit card or through check or money order
- If you decide to use EFTPS, select "1040 US Individual Income Tax Returns" and "deferred Social Security tax" as the payment type. Use the 2020 tax year when making a repayment.
- Even if more assistance is provided to small business owners and the self-employed, it could not be enough to pay all future tax obligations. Whatever you decide, keeping meticulous records of your earnings and outgoings will be very useful when it comes time to prepare and submit your quarterly estimated taxes. Most likely, you already do this.
- If a self-employed person is unable to pay the entire deferred tax amount back, they should pay whatever they can by the instalment due dates.
- Visit the IRS website or get in touch with them directly if you want to find out more about the requirements for Social Security tax deferral for the self-employed.
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