The IRS issued PMTA 2021-07[1] that addresses a problem taxpayers who deferred employer FICA under the CARES Act may run into this year or next—with a consequence far more negative than they would believe would happen for what to them appears to be a minor error.

The question to be answered by this PMTA is the following:

If any portion of an employer’s section 3111(a) (employer portion of social security) taxes or so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(a), the payment and deposit due dates of which are deferred under CARES Act section 2302, is not deposited by the applicable installment due date, is the deferral of the deposit due date invalidated for all of the employer’s deferred section 3111(a) or 3221(a) tax, rather than just the remaining delinquent portion? Is the result that the section 6656 penalty for failure to deposit taxes is applicable to the entire deferred amount, assuming that no exception to the penalty applies?[2]

The answer to this question may come as a major (and not positive) surprise to those who took advantage of this deferral:

Yes to both questions. CARES Act section 2302(a)(2) conditions the deferral of deposits on the timely deposit of all amounts deferred by the applicable due dates of December 31, 2021 and December 31, 2022.2 For example, if an employer defers the deposit of its portion of the section 3111(a) tax (the employer’s portion of social security tax) in the amount of $50,000, and deposits and pays $25,000 on December 31, 2021 but fails to make any additional deposits or payments by December 31, 2022, the employer is liable for a section 6656 penalty on the entire $50,000 if no exception to the penalty applies.

Since the penalty under IRC §6656 for failure to timely deposit payroll taxes that are paid more than 15 days after the date due is 10% of the amount due, a penalty equal to 10% of the total amount deferred would be due if the taxpayer makes a minor error in getting the proper amount deposited by December 31, 2021, or December 31, 2022.

The PMTA points out the details of the deferral provision that was found in the CARES Act as follows:

Section 2302(a)(1) of the CARES Act changes the due date for the payment of certain employment taxes to the applicable date defined later in the statute. Section 2302(a)(2) provides that deposits of those taxes will not be treated as due on the dates required by Treas. Regs. §§ 31.6302-1 and 31.6302-2, if certain conditions are met. Specifically, CARES Act section 2302(a)(2) provides that:

Notwithstanding section 6302 of the Internal Revenue Code of 1986, an employer shall be treated as having timely made all deposits of applicable employment taxes that are required to be made (without regard to this section) for such taxes during the payroll tax deferral period if all such deposits are made not later than the applicable date.[3]

The applicable date is defined as follows as noted by the PMTA:

The term “applicable date” means December 31, 2021, with respect to 50% of the eligible deferred amount of tax deferred under CARES Act section 2302(a); and December 31, 2022, with respect to the remaining tax so deferred. CARES Act § 2302(d)(3). If an employer pays any amount before the applicable dates, any such payment is first applied to reduce the employer's liability for an amount due on December 31, 2021 and then to the amount due on December 31, 2022.[4]

The PMTA summarizes the rules as follows:

In other words, CARES Act section 2302(a)(2) allows an employer to defer, without incurring a penalty under section 6656, its deposits of the applicable employment taxes until December 31, 2021 and December 31, 2022, provided that the conditions stated in CARES Act section 2302(a)(2) are satisfied.[5]

But the problem is that the provision conditions allowing for the late deposit on the entire deferred amount only if the required payments are made timely and in at least the amounts required:

CARES Act section 2302(a)(2) conditions the deferral of deposits on the deposit of all deferred amounts by the applicable installment due dates. Specifically, the deferral of the deposits is valid provided “all such deposits are made not later than the applicable date.”[6]

Thus, any failure to make at least the cumulative amount of the payments due by the appropriate December 31 deadline triggers a penalty on the entire amount deferred with the due date of the deposit going back to the date the taxes originally would have been due in 2020 or very early in 2021 (more than 15 days before either December 31, 2021, or December 31, 2022):

If any portion of the deposit is not made by the applicable date, whether December 31, 2021, as to the first installment, or December 31, 2022, as to the second installment, then the deferral is completely invalid. In that event, the deposits were due on the usual deposit due dates provided in Treas. Regs. §§ 31.6302-1 and 31.6302-2, which would be the due dates used in determining any penalties under section 6656.[7]

The IRS gives the following examples of the application of these penalties:

Example One-Insufficient Payment on December 31, 2021, PMTA 2021-007

Assume that an employer is liable for section 3111(a) tax, the employer's share of social security tax. Under CARES Act section 2302(a), these taxes are not due until the applicable due dates of December 31, 2021 and December 31, 2022. The employer is also required to deposit these taxes by section 6302 and its implementing regulations. Assume that any failure to deposit is not due to reasonable cause, and no other exception is applicable. Additionally assume that an employer has deferred, under CARES Act section 2302(a)(2), the deposit for the maximum amount of the employer's section 3111(a) tax for the 2020 tax year allowed to be deferred, and that this maximum amount deferred is a deposit of $50,000 of section 3111(a) taxes. As a result, under CARES Act section 2302(d)(3), the employer must deposit $25,000 by December 31, 2021, and the remaining $25,000 by December 31, 2022.

If, for the 2020 tax year, the employer deposits $5,000 on December 31, 2021, and makes no other deposits before December 31, 2021, the 10% penalty under section 6656(b)(1)(A)(iii), for failure to deposit tax for more than 15 days, applies to the entire $50,000, and the penalty amount would be $5,000. Because the first installment of $25,000, due on December 31, 2021, was not deposited by that date, the deferral is invalidated as to the entire $50,000. If, on February 7, 2022, the IRS issues a notice demanding payment of the balance of the first installment, and the employer does not pay the full amount demanded by February 17, 2022, the penalty rate increases to 15 percent.

Example Two-Late Payment for December 31, 2022, PMTA 2021-007

Assume the same facts as in the first example, except that the first deposit of $25,000 was timely made on December 31, 2021.

If the employer deposits the remaining $25,000 on February 28, 2023, the 10% penalty under section 6656(b)(1)(A)(iii), for failure to deposit tax for more than 15 days, applies to the entire $50,000, and the penalty amount would be $5,000. Because the second installment of $25,000, due on December 31, 2022, was not timely deposited, the deferral is invalidated as to the entire $50,000. If, on February 6, 2023, the IRS issues a notice demanding payment of the second installment of $25,000, and the employer does not pay the full amount demanded by February 16, 2023, the penalty rate increases to 15 percent.

Note that in both cases, a full $5,000 penalty (10% of the total $50,000 deferred FICA taxes) is due assuming the payment is made before the date 10 days after the IRS issues a demand for payment—and if the payment isn’t made until after that date, the penalty will grow to $7,500 (15% of $50,000).

While the taxpayers can argue for reasonable cause for failing to timely pay the balances due, advisers should probably begin to warn any clients that deferred the payroll taxes of the importance of making sure the deposits are made in the proper amount and on or before each due date. It is not likely a taxpayer stating “I forgot about the payment being due” is going to be deemed to have provided reasonable cause for failing to pay the taxes timely.

[1] PMTA 2021-07, August 23, 2021, https://www.irs.gov/pub/lanoa/pmta-2021-07.pdf (retrieved August 24, 2021)

[2] PMTA 2021-07, August 23, 2021

[3] PMTA 2021-07, August 23, 2021

[4] PMTA 2021-07, August 23, 2021

[5] PMTA 2021-07, August 23, 2021

[6] PMTA 2021-07, August 23, 2021

[7] PMTA 2021-07, August 23, 2021