In 2020, the US Congress passed the CARES Act to help ease pandemic-related difficulties for small businesses and taxpayers. One of the act’s key provisions allowed some taxpayers to take a self-employment tax deferral.
Across the country, many businesses and self-employed individuals took advantage of the deferral. However, a key deadline for deferred tax payments is coming up. This guide explains everything you need to know about CARES Act tax deferrals.
What is a Self-Employment Tax Deferral?
Many people who are self-employed pay their taxes much differently than typical W-2 employees. Employers of W-2 workers take a small portion of their employee’s paycheck and pay that to the state and federal government. Since self-employed people don’t have an employer they are receiving a paycheck from, they pay their estimated taxes quarterly.
The CARES Act made it possible for businesses and self-employed individuals to defer some of their 2020 tax liabilities. This means that they were able to able to pay their taxes owed at a later date (i.e. defer their taxes). Pushing off the due date for tax liabilities was a great way to lend a helping hand to businesses and individuals that were struggling in 2020. Deferring tax payments would allow them to have more funds available to keep their businesses afloat.
What Are the Terms of the IRS Tax Deferral?
The CARES Act enabled business and self-employed individuals to defer the payment of a portion of Social Security tax. The tax deferral period began on March 27, 2020, and ended on December 31, 2020. Under the CARES Act, businesses employing W-2 workers were able to defer their share of Social Security tax. Since employers and employees split the burden of Social Security tax, this works out to 50% of the tax owed.
However, self-employed taxpayers don’t have an employer to split the tax burden with. Unfortunately, self-employed individuals can’t defer their entire Social Security tax over the eligible deferral period. Instead, they can only defer half of their tax burden.
This means if you are a self-employed individual who owed $10,000 of Social Security tax from March 27, 2020, to December 31, 2020, you would only be able to defer $5,000. The other $5,000 should have been paid to the federal government at this point in time.
Although this may seem unfair for those who are self-employed, the same percentage of tax is being deferred. This is because employees of businesses weren’t able to defer their Social Security tax payments. Since employees and employers split the Social Security tax burden 50/50, the same percentage of tax is being paid.
Who Qualifies for a CARES Act Tax Deferral?
Both businesses and self-employed individuals were eligible to defer a portion of their Social Security Tax via the CARES Act. As we previously mentioned though, the rules are a bit different for those who are self-employed. Additionally, the CARES Act tax deferral was a one-time gift from the government. We’ve explained more on this below:
Is the Self-Employed Tax Deferral Still Available?
Unfortunately, no. The CARES Act tax deferral option expired at the end of 2020. However, if you used the CARES Act to defer taxes in 2020, you still have quite a bit of time to pay your tax bill. We’ll dive deeper into the repayment schedule for deferred taxes in the next section.
CARES Act Self-Employed Tax Deferral Repayment Schedule
If you deferred taxes under the CARES Act, you must pay 50% of your eligible tax by December 31, 2021. The remaining amount comes due a year later on December 31, 2022.
Let’s look at an example.
We’ll assume that you deferred $20,000 of your eligible tax burden (from March 27, 2020, to December 31, 2020). In this case, you would have to pay at least $10,000 by December 31, 2021. You must pay the remaining tax burden by December 31, 2022.
The CARES Act self-employment tax deferral was a big help for small businesses. It allowed countless businesses to stay afloat through incredibly difficult times.
However, it’s important for those business owners to know that their payment dates are looming. On December 31, 2021, those who deferred their tax payments will need to pay half of the amount they deferred. Remaining cognizant of this and keeping money set aside to pay their tax bill is key for those who deferred their tax payments.
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