IRS Updates Guidance on Payroll Tax Deferral Repayments as Deadlines Pass

The Internal Revenue Service issued guidance reminding employers of their obligations under the 2020 payroll tax deferral program. With all repayment deadlines now passed, the IRS warned that missed payments would trigger penalties and interest charges, underscoring the importance of timely tax compliance.

What Employers Need to Know About Deferred Taxes and Repayment Rules

The IRS guidance addressed deferred taxes arising from the 2020 payroll tax deferral program. The deferral, originally established under Notice 2020-65 and later modified by section 274 of the COVID-related Tax Relief Act of 2020, allowed certain employers to postpone withholding and paying the employee share of Social Security taxes on wages paid between September 1 and December 31, 2020, subject to a per-pay-period wage threshold.

Repayment Deadlines and Deferred Amounts

Under the modified rules established by IRS Notice 2021-11, employers were required to withhold and pay the total deferred applicable taxes ratably from wages and compensation paid between January 1, 2021, and December 31, 2021. Both the repayment window and the underlying deferral period have now closed. Interest, penalties, and additions to tax began accruing on January 1, 2022, with respect to any applicable taxes that remained unpaid after that date.

The IRS enforced these deadlines strictly. Employers that failed to meet their repayment obligations became subject to interest charges and penalties on the outstanding balance once the deadline passed.

Employment Tax Deposits and Reporting

Employers were required to track deferrals carefully in their employment tax returns and ensure accuracy in their annual returns. The IRS clarified that repayment had to be recorded as employment tax deposits separate from other tax payments, including federal income withholding and Medicare taxes.

Approved Payment Methods

The IRS directed taxpayers to use the Electronic Federal Tax Payment System (EFTPS) for repayments. For those unable to access EFTPS, alternative payment methods include debit card, credit card, money order, or check. The IRS cautioned that each payment had to be coded separately from routine deposits to avoid processing errors.

Compliance Enforcement

The IRS issued notices to employers who appeared noncompliant and pursued penalties and interest on unpaid balances. Employers that failed to remit deferred taxes by the applicable deadline faced accruing interest and additions to tax beginning January 1, 2022.

Background: The 2020 Payroll Tax Deferral Program

The payroll tax deferral originated from a presidential memorandum issued in August 2020, directing the Treasury Secretary to defer certain payroll tax obligations during the COVID-19 pandemic. The IRS implemented this through Notice 2020-65, which postponed the due date for employers to withhold and pay the employee share of Social Security tax on qualifying wages. Congress later codified and extended the repayment window through section 274 of the COVID-related Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021, which pushed the repayment deadline from April 30, 2021, to December 31, 2021.

The measure was designed to provide short-term economic relief by preserving employer cash flow during a period of unprecedented uncertainty. However, tax professionals cautioned that the deferral created compliance obligations that had to be carefully managed, particularly in tracking which employees' wages qualified and ensuring repayments were applied to the correct periods.

IRS Enforcement and the Risks of Missing the Repayment Deadline

Applicable Due Dates

All deferred applicable taxes were due to be repaid ratably over the course of calendar year 2021, with interest, penalties, and additions to tax beginning to accrue on January 1, 2022, for any amounts still outstanding. Employers that missed this deadline became liable for those additional charges on the unpaid balance.

Federal Tax Payment System and Payment Methods

Employment tax deposits tied to deferred taxes had to be submitted through the Electronic Federal Tax Payment System. The IRS required each such payment to be coded separately from routine deposits to avoid errors in crediting and processing.

Consequences of Noncompliance

Failure to repay deferred taxes by the applicable deadline resulted in the accrual of interest, penalties, and additions to tax beginning January 1, 2022. Employers are urged to review their employment tax return filings to confirm that all deferred amounts were accurately reported and repaid.

Where to Find Additional Information on Deferred Deposits and Repayments

IRS Guidance for Employers

Employers seeking guidance on how the 2020 payroll tax deferral was administered can review IRS Notice 2021-11, which modified Notice 2020-65 and established the December 31, 2021, repayment deadline. The IRS also provides general information on repaying deferred payroll taxes at IRS.gov.

GAO Review of COVID-19 Tax Relief Programs

For context on the program's scope and implementation challenges, the Government Accountability Office published the report COVID-19: IRS Implemented Tax Relief for Employers Quickly, but Could Strengthen Compliance, available at GAO.gov. These sources offer additional background for employers and businesses reviewing their past employment tax obligations.

By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now