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COVID-19: Self-Employment Tax Deferral — Red Herring

COVID-19: Self-Employment Tax Deferral — Red Herring

As a part of the CARES Act the IRS provided interest-free deferral of the part of Self-Employment tax.

See FAQ21 of IRS: Deferral of employment tax deposits and payments through December 31, 2020.

21. Are self-employed individuals eligible to defer payment of self-employment tax imposed on net earnings from self-employment income?

Yes. Self-employed individuals may defer the payment of 50 percent of the Social Security tax imposed under section 1401(a) of the Internal Revenue Code on net earnings from self-employment income for the period beginning on March 27, 2020, and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the "payroll tax deferral period.") Self-employed individuals determine their net income from self-employment and deductions based on their method of accounting. Most self-employed individuals use the cash method of accounting and will therefore include all income actually or constructively received during the period and all deductions actually paid during the period when determining their net income from self-employment.

Be very wary — Risk of Tax Underpayment

Like other COVID-related initiatives, the payment deferral processing has not been properly implemented.

The way it's processed now creates a risk of tax underpayment by those who now use the deferral.

The deferred amount is described as a "Payment or Refundable credit" on Page 2 of the Form 1040.

Payment vouchers for deferred payments are not generated

The payment voucher generated only for the amount due now, not for the total tax, the taxpayer owes to the IRS. This will give off a false impression to many taxpayers that they do not need to pay the future tax.

Vouchers for the deferred payments are not generated. Taxpayers may be unaware of future tax liability.

IRS will send reminders, but clients will likely not receive them

The IRS intends to send reminders to employers about payment dates for the deferred amounts yet nothing is said about vouchers for self-employed individuals.

20. Will the IRS issue reminder notices to taxpayers reflecting the total amount of deferred taxes and the payment due dates? (added July 30, 2020)

The IRS intends to issue a reminder notice to employers before each applicable due date. Because each return period is treated separately for purposes of determining the amount of tax due for the period, Form 941 filers that deferred in all four quarters of 2020 may receive four reminder notices stating the deferred amounts that are due on the applicable dates in 2021 and 2022, even though the amounts for all four quarters will have the same due dates of December 31, 2021, and December 31, 2022.

Even if reminders get sent to the individuals, they will reach taxpayers living abroad late or not at all.

If you wish to utilize the deferral, let your tax preparer know.

Only if you are unable to pay the full amount of tax now, it makes sense to utilize the deferral.

Beware that the unpaid portion is not credited or refunded; you will be solely responsible for making future payments.

Ines Zemelman, EA
Founder of TFX