For federal payroll taxes that were deferred as far back as 2020, businesses have until December 31, 2022, to fulfill their obligations. Businesses risk receiving hefty tax penalties if they don’t follow the rules.

You and your clients might not even be aware that the deadline for a recent tax break is approaching. For federal payroll taxes that were deferred as far back as 2020, businesses have until December 31, 2022, to fulfill their obligations. If a company fails to comply, it may face a hefty tax penalty.

Background

Payroll taxes collected by the federal government are the responsibility of both employers and employees. There are two primary components:

1. Social Security tax:  The Social Security wage base in 2022 is $147,000. Do not deduct money from an employee’s earnings for Social Security taxes once they exceed the annual wage base. Also, don’t add anything else. Not every employee will earn more than the withholding limit. Continue year-round withholding and contributions if an employee’s pay is below this threshold. In 2022, the maximum Social Security contribution is $9,114 ($147,000 x 0.062).

2. Medicare tax: The 1.45% Medicare payroll tax portion applies to all wages.

Thus, if an employee earns $200,000 in 2022, the Social Security tax is $9,114 (6.2% of $147,000) and the Medicare tax is $2,900 (1.45% of $200,000). The total tax is $12,014.

Tax relief

Congress provided relief to businesses that were struggling during the pandemic. Employers could defer their share of the Social Security tax portion of federal payroll taxes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act from March 27, 2020, to December 31, 2020. The deferred amount had two payment deadlines: the first was at the end of 2021 and the second was at the end of 2022.

This payroll tax break was subsequently extended for wages paid from January 1, 2021, through December 31, 2022, by the American Rescue Plan Act (ARPA).

The day of judgment, however, is rapidly approaching. Businesses have until December 31, 2022, at midnight, to pay the remaining amount. The majority of businesses ought to have already paid the first half of the taxes.

If a company fails to pay payroll taxes on time, the penalty is 10% of the total deferred amount. For example, if a company postponed $100,000 in payments, the penalty is $10,000. If the company fails to deposit the taxes within ten days of receiving a notice from the IRS, the penalty is increased to 15%.

Note: Payroll tax deferral is not available for wages paid in 2022. A business must therefore pay the deferred tax as well as its regular responsibilities for wages paid this year.

The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.

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