Companies that took advantage of the payroll tax deferral under the Coronavirus Aid, Relief, and Economic Security (CARES) Act should be aware of an IRS position regarding repayment of the deferred taxes. If repayment is delinquent, even by just one day, a harsh consequence could ensue.
Section 2302 of the CARES Act allowed businesses to elect to defer the employer’s share of Social Security tax on wages paid to employees between April 1 and Dec. 31, 2020. This provided cash flow relief to businesses struggling to cope with the pandemic, since the business was not required to deposit its 6.2% share of Social Security taxes when wages were paid. The deferred taxes are to be repaid in two installments: 50% due by Dec. 31, 2021, and 50% due by Dec. 31, 2022. Companies small and large have taken advantage of what is essentially an interest-free loan from the government.
IRS legal memorandum PMTA 2021-07 states that a late payment of the CARES Act deferred tax would make the entire amount deferred subject to a 10% failure to deposit penalty – not just on the first installment due by year-end 2021. In other words, a late payment of the first installment of the deferred tax due by the end of 2021 accelerates the payment of the second installment that otherwise would not be due until Dec. 31, 2022, and the 10% penalty would be due on the entire amount. In such a situation, if the IRS demands payment of the entire amount of deferred taxes, and they are not paid within 10 days, the...
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