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.

 

Repayment Process

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.

 

BDO Insight:

The implication of the new January 3, 2022 repayment date should be carefully considered by operators with a 52/53-week year end. When a tax provision effective date refers to a tax year, such as the last day of the tax year, that provision applies to 52/53-week filers as if their year ended on the last day of the calendar month nearest to the last day of the 52/53-week taxable year. Since neither the original repayment date of December 31, 2021 nor the revised date of January 3, 2022 references a tax year (i.e., the rules do not reference the last day of the tax year, but rather, reference an actual date), payment must be made by the end of the actual 52/53-week year to be deducted on this year’s 52/53 week year tax return.

For a practical example, consider a restaurant with a 52/53-week year ending December 26, 2021 (the last Sunday in December). If the restaurant waited until December 31, 2021 or January 3, 2022 to make the first 50% repayment, the deduction on the deferred Social Security tax would be allowable on the tax return for the year ending December 25, 2022. The same can be said for the utilization of any FICA credits that are being carried forward; these credits will not become available until the 52/53-week year in which the repayment is made. On the other hand, if payment were made on December 20, 2021, the payroll tax deduction and FICA tip credit would be allowed on the current year return for the year ending December 26, 2021.

 

BDO Insight:

Traditional tax planning prescribes that deductions and credits should be accelerated into the earliest tax year to benefit from an immediate reduction in tax liability. It is worth noting, however, that pending federal legislation may increase tax rates for tax year 2022. If the bill is passed, the tax liability impact of a deduction in 2022 would be enhanced over 2021.

Operators already projecting a federal taxable loss during 2021 may find it beneficial under certain circumstances to purposely defer the payroll tax deduction to tax year 2022 by making the first repayment after the end of their 2021 52/53-week fiscal year (but before January 3, 2022 to avoid interest and penalties on the entire deferral). On the other hand, operators that are flush with cash may decide to repay 100% of their deferral before the end of their 2021 fiscal year to receive 100% of the benefits of the payroll tax deduction (and corresponding FICA credits, if applicable) on their 2021 tax return.

Since every tax situation is different, restaurants are encouraged to work with their advisors to model out the tax impacts of making the repayment before versus after the close of their 2021 fiscal year. Employers looking to take the payroll tax deduction and FICA tip credit on their 2021 return should plan now to ensure payment is made far enough in advance to completely clear the bank by the end of their fiscal year to avoid any potential complications.