The CARES Act was passed by Congress in 2020 to help alleviate the financial stress caused by the pandemic. It included provisions for both individuals and small businesses – one being a self-employment tax deferral. While it’s no longer available, some self-employed individuals are facing severe consequences as they’re unable to repay the deferred tax that’s now owed to the Internal Revenue Service (IRS).
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How Does Self-employed Tax Deferral Work?
Self-employed individuals generally make estimated quarterly tax payments. However, under the CARES Act, they were allowed to defer 50 percent of the payment of Social Security tax from March 27, 2020, to December 31, 2020.
IRS Terms for the Tax Deferral
The deferred amount would be payable to the IRS in two halves. So, for example, if you owed $25,000 of Social Security tax during this period, only $12,500 would qualify for deferral, and the remaining $12,500 would have been due per the normal payment schedule.
Social Security Tax Deferral Under the CARES Act
Who Is Qualified for Tax Deferral?
Businesses, including government entities, and self-employed individuals were allowed to defer Social Security tax under the CARES Act.
How Can It Help Self-employed Individuals?
The primary benefit of the Social Security tax deferral was to help self-employed individuals keep more cash on hand at the height of the pandemic.
Approximately 50 percent of deferred Social Security tax was due by December 31, 2021. The other half must be paid by December 31, 2022, to avoid penalties and interest.
To illustrate how the Social Security tax deferral worked under the CARES Act, assume you earned $74,000. The amount of income that would qualify for the deferral period would be $57,350 ($74,000 * .775), or 77.5 percent of earnings during the deferral period.
You’d take that figure and multiply it by 92.35 percent to find the amount of net self-employment income that’s taxable per the IRS. In this case, it would be $52,962.73 ($57,350 * .9235).
The final step would be to multiply the net earnings figure by .062, which is the percentage of self-employment tax that can be deferred.
So, $3,283.69 would be eligible for deferral ($52,962.73 * .062).
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What Happens If You Decide to Defer Your Self-Employment Tax?
If you elected to defer your share of Social Security tax, you would retain these funds in your account and remit payment in two increments. Half would be payable by December 31, 2021, and the remaining portion by December 31, 2022.
However, an exception to the rule applies if you choose to defer a portion of the allowable amount. To illustrate, if you’re eligible to defer $8,000 but only defer $6,000, only $2,000 would be payable by December 31, 2021. The remaining $4,000 will be due on December 31, 2022.
How Does the Repayment Process Work?
You have four options to remit payment to the IRS:
- The Electronic Federal Tax Payment System
- Debit card or credit card
- Money order
Penalties for Non-payment of Deferred Self-Employed Tax
Failure to deposit deferred self-employment tax or make arrangements with the IRS to pay in installments by the due date could result in significant penalties. You could also be assessed interest on the balance owed.
What to Do If You Can’t Pay Your Self-Employment Taxes
If you can’t pay your self-employment taxes, you may be eligible for a short-term payment plan or IRS installment agreement.
But if you’re already facing collection action from the IRS or are overwhelmed at the thought of not being able to pay what’s owed, it’s worthwhile to get professional tax help. The team at Larson Tax Relief specializes in helping business owners and individuals resolve tax-related issues.
Their goal is to provide exceptional service and ensure that business and individual taxpayers do not pay a cent more than what’s owed to the IRS or state taxing authorities. Assistance is available in all 50 states, and there are 15 Enrolled Agents on staff that are well-versed in handling these types of tax situations.
If you owe over $25,000 to the IRS or your state tax authority, complete the online form to request a free consultation. A tax expert will work with you to understand your unique tax situation and devise a tailored solution that provides you with the best possible outcome.