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Late penalties hit on deferred payroll tax amount

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Tax Hot Topics newsletter The IRS has released guidance indicating that any partial late payment of deferred payroll taxes will result in a penalty on the entire deferred amount.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted March 27, 2020, allowed employers to defer deposits of their 6.2% share of the Social Security tax due from March 27, 2020, through Dec. 31, 2020. Half of any deferred amount is due by Dec. 31, 2021, while the other half is due by Dec. 31, 2022.

The IRS Chief Counsel office subsequently released a memo indicating that if any portion of the deferred payroll taxes is not deposited by the applicable installment due date, the entire amount of deferred payroll taxes is late—not just the remaining delinquent portion.

Because of this, the Section 6656 penalty for failure to deposit taxes is applicable to the entire deferred amount if no other exception to the penalty applies (e.g., failure is due to reasonable cause and not due to willful neglect). The penalty under Section 6656 is initially 10% of the underpayment if the failure is for more than 15 days. However, if the tax is not paid within 10 days of the first IRS notice sent to the taxpayer demanding payment of any delinquent amount, the penalty increases to 15% of the underpayment.

Thus, if an employer defers its portion of Social Security tax under the CARES Act in the amount of $500,000, and deposits and pays $245,000 on Dec. 31, 2021—$5,000 less than the $250,000 installment due on that date—and fails to make any additional deposits or payments on or before Jan. 15, 2022, the entire deferral is considered invalid and the employer would be liable for a Section 6656 penalty on the entire $500,000 (if no exception to the penalty applies).

Contact:
Jeff Martin
Partner
Washington National Tax Office
T +1 202 521 1526

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