Payroll Tax Deferral: Deadlines and Tax Changes to Note for 2023

Key takeaways

The remaining portion of the payroll tax deferral amount is due December 31, 2022.
Payments submitted by January 3, 2023, will be considered timely, as December 31 falls on a Saturday.
Failure to pay your deferred payroll tax amount can result in a penalty on the entire amount, not just the amount remaining.

Payroll tax deferral was one of the initiatives passed to help US businesses survive the COVID-19 pandemic. If you took advantage of payroll tax deferral, you likely already repaid half of the Social Security taxes you owed.

As a small business owner or self-employed individual, it’s essential to finish paying off your deferred amount. Let’s break down the ins and outs of payroll tax deferral and what you need to know moving forward.

What is payroll tax deferral?

Payroll tax is a type of tax deducted from an employee’s paycheck during payroll processing. Some payroll taxes are withheld from the employee’s pay, some are covered by the employer, and some are split 50/50.

The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer the deposit and payment of their share of Social Security payroll taxes. Self-employment tax deferral was also offered to self-employed individuals, allowing them to postpone paying certain self-employment taxes. The 2021 American Rescue Plan Act extended these benefits to help business owners.

Businesses with over $2,500 (USD) in employment tax liability must pay employment taxes incrementally on a return period based on the total of their liability (i.e., semi-weekly, monthly, next-day). For most employers, the repayment period is a calendar quarter. Businesses that fail to deposit their employment taxes on time have to pay a penalty on top of the taxes owed.

Under section 2302 of the CARES Act, employers may defer their share of deposits for Social Security taxes during the “payroll tax deferral period” and the payments on the wage taxes incurred during that period.

What payroll taxes are active in 2023?

Active payroll taxes for employers in 2023 include:

Social Security taxes: 6.2% paid by the employer and 6.2% paid by the employee for their portion of Social Security tax (12.4% total)
Medicare tax: 1.45% for the employer and 1.45% for the employee (2.9% total)
Federal unemployment tax (FUTA): 6.0% on the first $7,000 of wages (not matched by employees)
State unemployment tax: Varies by state (employees match in certain states)

Self-employed individuals pay their own income tax. This includes the full amount of Social Security and Medicare taxes, or Federal Insurance Contributions Act (FICA) taxes–both the employer and employee portion.

For more information, check out our guides on small business payroll and taxes and independent contractor taxes.

Are there any changes to payroll taxes in 2023?

While the Social Security tax rate will stand firm at 6.2%, the wage base for employees will increase to $160,200, meaning employers pay 6.2% on the first $160,200 each employee earns, with a maximum tax of $9,932.

The tax rate for Medicare taxes will remain unchanged at 1.45% with no wage base limit.

For self-employed individuals, including independent contractors, the taxable earnings base will remain at 15.3% for FICA taxes (12.4% for Social Security and 2.9% for Medicare). You do not have to pay self-employment taxes if your annual net earnings are less than $400, but you still need to file an income tax return.

What is the deadline for deferred payroll taxes in 2023?

The remaining portion of the payment deferral is due December 31, 2022. Since that date falls on a Saturday, payments submitted by January 3, 2023, will be considered timely.

Employers should have paid at least half of the amount deferred before December 31, 2021, and the remaining portion by December 31, 2022. For instance, if you were approved to defer payment totalling $4,000, you should have repaid at least $2,000 in 2021. That means you owed another $2,000 (or less) before the end of 2022 to cover the total amount.

How much can employers defer?

Under the CARES Act, employers could defer their share (50%) of Social Security taxes on wages (6.2% on all earnings) made between March 27, 2020, and December 31, 2021.

How is tax deferral paid back?

The Internal Revenue Service (IRS) offers a few methods for taxpayers to pay deferred payroll taxes.

Employers and self-employed individuals can submit deferral payments through the Electronic Federal Tax Payment System (EFTPS), credit or debit card, or check or money order.

The EFTPS online portal has the option to make a deferral payment. After logging in, select Deferred Social Security Tax on the Tax Type Selection screen, and change the date to the applicable tax period to see your balance.

Self-employed individuals can also use IRS Direct Pay. You can apply a payment to the 2020 tax year by selecting “balance due” as your reason for payment and “installment agreement” if you’re paying with a card.

What happens if deferred payments aren’t repaid on time?

An IRS notice regarding deferred payroll tax payments states that “failure to deposit any portion of the deferred taxes by the applicable due date would result in a penalty for the entire deferred amount going back to the original due date.”

What is the difference between deferring and withholding payroll taxes?

Payroll tax withholding is a mandatory practice where an employer reserves a portion of an employee’s gross wages to cover income tax obligations. The employee’s income rate determines the amount withheld. Payroll tax deferral only applies to the employer’s share of Social Security taxes.

What’s the difference between a tax deferral and an employee retention credit?

The employee retention credit was another provision under the American Rescue Plan Act that gave businesses a payroll tax credit of up to $10,000 for each full-time employee per quarter until January 1, 2022. Employer tax deferral only postpones payment instead of limiting the amount owed.

There are significantly fewer restrictions for payroll tax deferral compared to employee retention credits.

Payroll tax deferral is:

Open to all employers, employees, and self-employed individuals
Available for taxed income between March 27, 2020, through December 31, 2021
Only applicable to the employer’s portion of the Social Security Deposit
A postponement of paying the amount owed (50% by December 31, 2021, and 50% by December 31, 2022)

Additionally, payroll tax deferral has no impact on Families First Coronavirus Response Act (FFCRA) or Paycheck Protection Program (PPP) loans.

Payroll tax credit:

Offers employers a partial or full closure by law with a significant decline in gross receipts
Is available to companies with 100 or more full-time employees, working or not
Is not available for self-employed individuals
Covers taxed income between March 13, 2020, to December 31, 2021
Affects the employer portion of qualified Social Security taxes
Comes as a refundable credit
Doesn’t offer credit for PPP loans or FFCRA credits

Manage payroll and payroll taxes with Deel

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Disclaimer: This post is provided for informational purposes and should not be considered legal advice. Talk to a legal professional such as a CPA for more info.