Repayment of Deferred Employer Social Security Taxes
The past 18 months have ushered in immense hardship in the restaurant industry as the nation and the world try to find a new normal in the midst of the COVID-19 pandemic. Historic supply chain disruptions, labor shortages and now inflation are complicating recovery even further. Many federal and state relief programs, such as the Paycheck Protection Program, Employee Retention Credit and Restaurant Revitalization Fund, helped soften the impact to operators and have allowed them to keep their doors open.
One such relief program, enacted under the Section 2302 of the CARES Act (P.L. 116-136) in April 2020, allowed for a two-year deferral of depositing and paying the employer share of Social Security taxes on employee wages. The deferral period applied to taxes normally due between March 27, 2020 and December 31, 2020. The general rules announced at the time were that 50% of the eligible amount of deferred Social Security taxes had to be repaid by December 31, 2021, with the remainder due by December 31, 2022. Since December 31, 2021 is an observed federal holiday, the IRS recently announced that the first repayment will be considered timely if it is made by January 3, 2022. Operators will need to carefully consider the timing of their repayment, as it has implications on year-end tax planning.
Repayments can be made through traditional IRS payment channels, including EFTPS, by credit card or debit card, or by a check or money order. IRS guidance indicates that a separate deferral payment must be submitted with respect to each calendar quarter in 2020 (i.e., as opposed to one lump-sum payment aggregating amounts owed for multiple quarters in 2020). For the first repayment, at least 50% of the total eligible deferral amount for each quarter must be paid by January 3, 2022; otherwise, interest and/or penalties will apply to the entire deferral.
Tax Implications on Timing of Repayment
When planning to make repayment, it is important for operators to consider the income tax impacts of when the repayment is made. The date the repayment is submitted will dictate the year in which a tax deduction for employer Social Security taxes is allowed.
In addition, the date of repayment will impact the amount of FICA credit (Credit for Employer Social Security Paid on Certain Employee Tips) that can be claimed by restaurants with tipped employees. Since this credit is computed by referencing payroll tax paid on tips, a restaurant’s FICA credit was subject to limitation in 2020 when the deferral occurred. A corresponding amount of FICA credit will become available in the year in which repayment of payroll tax is made.