Every quarter, you must pay Social Security taxes for the employees you have on payroll. Each payment has two parts: the amount that is withheld from employees and the amount that you as an employer have to pay. Under the CARES Act, you are now able to defer strictly the employer portion of these taxes. For self-employed individuals not running payroll, this will apply to your self-employment taxes.
How do I defer my tax payments?
No action is required on your part yet. The IRS Form 941 for April to June 2020 will be updated to reflect this. For applicable taxes that occurred after March 27th and before March 31st, the IRS will provide an update on how to defer these taxes through either a credit or refund on what was already paid.
I’m self-employed and don’t have payroll. How does this program apply to me?
Self-employment tax can be deferred as well so long as your fiscal year ends between March 27 and December 31, 2020. If you’re self-employed, you are eligible to defer 50% of the Social Security tax you must pay based on your net earnings in 2020.
According to the IRS, self-employed individuals can use any reasonable method to allocate 50% of the Social Security portion of their self-employment tax. The instructions for Schedule SE state that a reasonable method is one where the division of amounts is proportional to the number of days in each period. For example, you can allocate 22.5% of annual earnings to the period from January 1, 2020 to March 26, 2020 and 77.5% of the individual’s annual earnings to the period from March 27, 2020 to December 31st, 2020.
Let’s say your net self-employment earnings for 2020 are $100,000. You can reasonably allocate $77,500 (77.5% x $100,000) to the deferral period (March 26, 2020 to December 31, 2020). As a self-employed individual, only 92.35% of your earnings are subject to social security tax. So, you would be taxed on $71,571.21 ($77,500 x 0.9235).
Additionally, you pay 12.4% of social security tax on your earnings. As you are allowed to defer 50% of your social security portion, you will only pay half of 12.4% (or 6.2%) of social security tax on your net earnings. So, the maximum deferral amount you are eligible for is $4,437.41 ($71,571.21 x 0.062).
When will I have to pay the deferred tax payments?
You will have to pay 50% of your tax bill by December 31st, 2021 with the remainder paid by December 31st, 2022.
What if I have a PPP loan I’m using for payroll?
Following the Paycheck Protection Flexibility Act that passed the senate on June 4th, having a PPP loan and applying for forgiveness on it will not affect your eligibility to defer the payment of your tax bill. You can now take advantage of both programs simultaneously.
Can I defer my taxes and still pursue employee retention tax credits?
Yes, if you are deferring your tax payments, you can still apply for the employee retention credits. You will not be penalized for not paying the tax bill while you figure out what you are eligible to receive as a retention credit.