If you’re a small business owner or a self-employed worker, you may have opted for the self-employment tax deferment benefit offered through the CARES Act. This benefit allowed individuals to defer a certain amount of their Social Security taxes until a later date to lighten the financial burden experienced by mom-and-pop shops during COVID-19 shutdowns.
In recent days, several clients have received a letter from the IRS notifying them of an upcoming balance due for their 2020 elected deferral amount. This letter has left some people confused and concerned about repaying their upcoming tax bill. Don’t panic. The IRS doesn’t expect the taxes right away. You’ll have time to space out your repayments so that it doesn’t put a strain on your cash flow.
To refresh, the IRS allowed self-employed individuals to delay the payment of 50% of the Social Security portion of their self-employment tax for the period between March 27, 2020 through December 31, 2020. If you have employees, you were also able to defer the 6.2% employer portion of the Social Security tax during that same period.
Since these amounts are a postponed payment rather than forgiveness, you must send in your deferral amount in two payments to the IRS:
- 50% by December 31, 2021
- 50% by December 31, 2022
You also have the option to pay it all now and be done with it or all at the end of this year or the second half when you file your 2021 tax return.
The IRS’ letter will include the amount that you deferred, but you can also find it on your Form 1040 and coinciding schedules. If you haven’t filed your 2020 tax returns yet, we can help you map out the right forms to use for your business. Self-employment schedules can be complex to complete, so please feel free to reach out to me with any questions at kerry@erocktax.com or (781) 247-5569. Extension deadlines are approaching, so contact me to get your taxes in order.
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Kerry McMenamy specializes in taxation for small business owners, helping them navigate self-employment tax, quarterly estimated tax payments, recordkeeping, and tax planning opportunities. Kerry started working with Erock Tax three years ago, bringing 20 years in the field of education. Her natural role as an educator assists many of our clients with their everyday income tax responsibilities.