The Internal Revenue Service (IRS) issued guidance regarding deferred tax reported by third party payers, or professional employer organizations (PEO). The CARES act gave businesses the benefit of the doubt with being able to defer payment of the employer’s share of Social Security and self-employment tax. With the first payment date approaching, employers need to consider what must be done to be compliant with the tax laws. Employers must pay 50% of the eligible deferral amount by year-end December 31, 2021 and the remaining difference must be paid by December 31, 2022. Any unpaid amount by these year-end dates will be subject to penalties and interest from the IRS.
The guidance provides that a PEO must have reported their client’s deferred tax deposits and tax payment of employer’s share of Social Security taxes on Schedule R of their aggregate Form 941 filings for 2020. This will make matching of subsequent payments with the amounts deferred much easier to coordinate by the IRS. PEOs should put in place a strategy to contact their clients that deferred taxes to schedule the repayments as required. The guidance is also clear that responsibility for the payment of the deferred taxes lies with the client and not the PEO.
Further issues may arise when a client customer became a new PEO client during 2020 and had already deferred some portion of employer taxes earlier in the year. Still yet, a client company may have switched from another PEO during the year 2020 and had deferred taxes reported by both PEOs.