Small business owners have a number of options to defer tax payment for 2020 taxes.
Here are 5 ways to do it.
1. Use Payroll and Self-Employment Tax Deferment
In March 2020, Congress passed the Coronavirus, Aid, Relief and Economic Security (CARES) Act, which included provisions for deferment without penalty of some Social Security payments on payroll and self-employment taxes which would have normally been due between March 27, 2020 and Dec. 31, 2020.
These payroll tax deferral provisions allow employers to delay the deposit and payment of the employer’s share of Social Security taxes. Self-employed individuals can defer payment of half of the Social Security portion of self-employment taxes. These deferrals apply to both deposits and payments of Social Security taxes.
When Deferred Payments Are Due
Under the Consolidated Appropriations Act update to the CARES Act passed in December 2020, employers and self-employed individuals can defer paying half of eligible deferred amounts until Dec. 31, 2021, and the remainder until Dec. 31, 2022, without incurring penalties.
All Employers Qualify
All employers, including self-employed individuals, are eligible for this deferred payroll tax program. Previous versions of the deferment had excluded recipients of Paycheck Protection Program (PPP) loans and of PPP loan forgiveness. All such restrictions were removed by the Paycheck Protection Program Flexibility Act on June 5, 2020. Employers who received a PPP loan can take the deferment, even if their loan has been forgiven.
No Special Application Required
Employers who are deferring payroll tax don’t need to make a special election to the Internal Revenue Service (IRS). Deferred payments should simply be reported on the appropriate line of employment tax returns. For example, employers using IRS Form 941 to report quarterly taxes can report deferrals on line 13b.
Distinct from Deferral on Employee Share of Payroll Taxes
It’s important to distinguish the deferral on the employer’s share of payroll taxes described above from a deferral on the employee (rather than employer) share of payroll taxes implemented by a presidential memorandum and IRS notice issued in August 2020.
Under this deferral, mandatory for some federal agencies but optional for the private sector, employers could opt to defer the employee portion of Social Security payroll taxes for any employee whose wages (as defined for Social Security purposes) were less than $4,000 for a biweekly period, applicable to wages paid from Sept. 1, 2020, to Dec. 31, 2020.
Under the original terms of this deferral, withholdings and payments could be deferred without penalty until Dec. 31, 2020, after which employers would be required to increase withholdings to repay deferred payments, with penalties and interest accruing starting May 1, 2021. This was updated in January 2021 so that employers now have until Dec. 31, 2021, to withhold and pay deferred taxes before penalties begin accruing on Jan. 1, 2022.
2. Apply for a Short-Term Payment Plan
A federal tax deferral option the IRS offers taxpayers who expect to be able to pay their taxes within a few months is a short-term payment plan. This option lets you avoid IRS collection notices and actions by agreeing to pay what you owe within a few months.
The normal time frame for a short-term payment plan is 120 days. However, this has been extended temporarily to 180 days because of the coronavirus pandemic.
No Set-Up Fee, But Penalties and Interest Apply
A short-term payment plan doesn’t require you to pay a set-up fee, unlike longer-term payment agreements the IRS offers. However, you still must pay accrued penalties and interest until your balance is paid.
Qualifying for Short-Term Payment Arrangements
To qualify for a short-term payment plan, you must owe less than $100,000 in combined tax, penalties and interest. You can only apply as an individual, not as a business. Business owners who are sole proprietors or independent contractors can apply as individuals to qualify.
Applying for Short-Term Payment Plans
You can apply for a short-term payment plan online, by filling out a Form 9465 (Installment Agreement Request) or by calling 800-829-1040. If you have previously applied online for an Online Payment, Get Transcript or Identity Protection Payment Identification Number (IP PIN), you can log into the IRS portal with your existing user identification and password.
You will need to provide information to verify your identity, such as your Social Security number. You can pay by direct payments from a checking or savings account, by check, by money order or by debit or credit card.
3. Apply for a Long-Term Installment Agreement
If you need longer than a few months to pay your taxes, another IRS payment deferment option is long-term installment agreements. A standard installment agreement spreads your payments out over 72 months.
Set-Up, Interest and Penalty Fees
A long-term installment agreement requires you to pay some set-up fees. Fees are lowest if you opt to pay your installments through automatic direct debits from a bank account and if you apply online. Fees are higher if you opt to pay through other options, which include:
- Direct payments from a bank account
- Online electronic payments
- Payments over the phone
- Money order
- Debit or credit card
Low-income taxpayers may qualify for a waiver on set-up fees. You can qualify as low-income if your adjusted gross income is at or below 250% of the applicable federal poverty level. If you have already applied for an installment agreement but you think you qualify as low-income, you can request a review of your status by submitting a Form 13844 within 30 days of your application.
While you are paying off your installment agreement, interest and some penalty charges continue to be added until your balance is paid in full.
Qualifying for Long-Term Payment Arrangements
If you owe $50,000 or less, you can normally qualify for a 72-month installment plan. If you owe more than $50,000 or need more than 72 months to pay, you may need to provide the IRS with additional information in order to qualify.
Applying for Long-Term Installment Agreements
You can apply online for a long-term installment agreement if:
- You are an individual who owes $50,000 or less in combined tax, penalties and interest and you have filed all your returns
- You are a business who owes $25,000 or less in combined tax, penalties and interest and you have filed all your returns
If you aren’t eligible to apply online, individuals can apply by filling out a Form 9465, along with a Form 433-F if applicable, or by calling 800-829-1040 or the number on your notice. Businesses can call 800-829-4933.
Sole proprietors or independent contractors should file as individuals.
4. Negotiate an Offer in Compromise
In some situations involving financially distressed taxpayers, another way to defer tax payment the IRS offers is settling for less than the amount owed, an arrangement known as an Offer in Compromise (OIC). Normally, the IRS accepts an OIC agreement which amounts to the maximum they could expect to collect within a reasonable time. Eligibility depends on considerations such as income, expenses and assets. The IRS website features an online tool to prequalify OIC applicants.
To help taxpayers who have a prior OIC agreement and are having difficulty keeping up with payments because of COVID-19, the IRS is offering additional flexibility. To request an update to an OIC agreement, call 800-829-1040 or the number of your bill or notice.
5. Request Currently Not Collectible Status
If you can’t pay your taxes because of a financial hardship situation, such as losing your income, the IRS allows you to apply for currently not collectible (CNC) status. This lets you defer payments until your financial situation allows you to resume payments.
After your financial situation improves, you will again be liable for paying what you owe. While you remain in CNC status, penalties and interest will accrue. The IRS may place a lien on you, and your debt may be taken out of future refunds.
To qualify for CNC, you must verify your financial hardship by producing documentation such as financial statements regarding your income, expenses or assets. The IRS will review your assets first to verify that you don’t have anything which could be used to pay your debt.
They will then check your income and living expenses to determine whether you could afford an installment agreement instead of going into CNC status. To get approved, you may need to complete a Form 433-F, 433-A, or 433-B. You can request CNC status by calling 800-829-1040 or the number on your bill or notice.
Learn How to Defer Taxes to Stabilize Your Cash Flow
Knowing how to defer tax payment obligations through payroll tax deferment or a payment agreement can provide you with the breathing space you need to stabilize your company’s cash flow and get your finances back on track.
To further assist you with meeting your tax obligations, you might consider seeking business financing to help you cover your tax payments and other expenses. Browse the Fast Capital 360 blog for more information on small business financing options, or take a few minutes to fill in our no-obligation application to find out which financing resources may be available to you.