What happens when your FICA deduction deferral expires?

As a business owner, you’ve endured your share of economic upheaval over the past months. In late March, Congress passed the Coronavirus Aid Relief & Economic Security Act to provide emergency financial relief. Complying with CARES Act requirements has been challenging at times, but the programs have helped many people survive pandemic shutdowns and cutbacks.

Like many of the original Cares Act programs, FICA payment deferrals offered temporary relief for employers. The FICA employee deduction deferral order didn’t go into effect until five months later. A presidential memorandum outlined the basics, but it didn’t explain what would happen when the employee FICA deduction deferral expires at the end of the year.

How Do FICA Deferrals Work?

In compliance with the Federal Insurance Contributions Act (FICA), employers and employees must pay FICA employment taxes. The taxes fund Social Security and Medicare programs. Employers pay 50% and deduct the remaining 50% from their employee’s wages.

• Social Security: Employers and employees split the current 12.4% FICA rate. Each pays 6.2% of the amount due. In 2020, this deduction applied only to the first $137,700 of an employee’s salary.
• Medicare: The 2020 rate for medicare deductions is 2.9%. The employer and employee pay 1.45% each. There is no wage limit, so the deduction applies to the employees’ whole salary.

FICA tax deferrals went into effect on two different dates. Effective March 27th, 2020 the Cares Act allowed employers to defer their 50% FICA contributions. Employees’ FICA deductions remained in place until an August 8, 2020, presidential memorandum.

The memorandum gave employers the option to defer their employees’ FICA deductions from September 1, 2020, until December 31, 2020. Those who took advantage of the programs will still owe the deferred FICA taxes. Eventually, both employers and employees must pay the deferred amounts

What Happens When the FICA Deduction Deferral Expires?

The deferrals for both employers and employees discontinue after December 31, 2020. At that point, both must repay the deferred amounts, but the consequences are different.

Repayment After Employer FICA Deferral Expires

Employers have an extended period to pay deferred FICA taxes. They may repay employer contributions in two equal installments.

• Employers have until December 31, 2021, to pay 50% of the eligible deferred payments/deposits.
• They must pay the remaining 50% by December 31, 2022.

Repayment After Employee FICA Deduction Deferral Expires

On August 28, 2020, the IRS issued Notice 2020-65 to explain unresolved issues contained in the August 8, 2020, memorandum. Beginning in January 2021, employers must resume their employee’s 50% FICA deductions. Between January 1, 2021, and April 30, 2021, they must also collect and pay previously deferred employee FICA tax amounts.

If employers fail to collect and pay an employee’s deferred FICA deductions by May 30, 2021, the IRS may charge interest and penalties. They may also begin collection actions.

Your Records Must Be IRS-Ready

Tax time is already busy for businesses like yours. If you accepted a PPP loan or took advantage of other Cares Act programs, documenting the supporting financial data can be overwhelming.

At Goode Bookkeeping and Consulting, our bookkeepers work with business owners throughout the area. We track, document, and sync financial data and present key information in organized financial reports. We understand that our work is often critical to IRS compliance, so we always perform professionally and meticulously.

Contact Goode Bookkeeping and Consulting

To learn more about our bookkeeping and back-office services, call us at (860) 968-2345 or complete our consultation form to arrange a free appointment.