Do I Have to Defer My Self-Employment Tax Payment?

Question

I’m a majority owner in a partnership. I know the CARES Act allows me to defer part of my tax year 2020 self-employment tax.

Do I have to do this? I’d rather pay the tax now.

Answer

We believe this provision is completely optional, as we explain below.

Deferral Provision

In Smart Selections from the COVID-19 Tax Relief Buffet, we explain this provision.

For self-employment income incurred between March 27, 2020, and December 31, 2020, you can defer payment of the employer Social Security portion of the self-employment tax, which is 6.2 percent of your net income from self-employment.

You’ll pay the deferred tax in two equal installments:·

Fifty percent is due December 31, 2021, and·

The remaining 50 percent is due December 31, 2022.

This provision doesn’t reduce your overall tax—it merely delays payment of it to help with your current cash flow.

Optional

While the IRS hasn’t explicitly said it is optional, no guidance uses language indicating you have to defer payment:·

The Joint Committee on Taxation wrote “The provision allows eligible employers and self-employed individuals to delay the deposit of certain employment taxes…” (not requires).1·

The IRS stated that “self-employed individuals may defer payment…” (not must).2

Pros and Cons

Here are a few reasons to consider using the deferral:·

It reduces your 2020 estimated tax payments, putting cash in your pocket now when your business income may be down.·

Delaying paying taxes to a future date with no penalty or interest gives you cash now that you can invest or save and earn money on (think time value of money).

But the one downside to deferral is that you create a debt that you have to pay in tax years 2021 and 2022.

Decide Later

If you don’t know what to do, you still have time to decide.

You’ll make the choice to defer payment on your 2020 tax return, so you could always pay the tax now, elect to defer on your 2020 return, and get a larger refund.

While waiting until 2021 when you file your 2020 tax return puts less cash in your pocket now compared to reducing your 2020 estimated tax payments today, you have that flexibility.

Takeaways

The CARES Act allows you to defer payment of a portion of your 2020 self-employment tax.

If you defer, you pay the deferred portion in two equal installments: 50 percent by December 31, 2021, and 50 percent by December 31, 2022.

Whether you choose to defer payment is up to you. You’ll make your deferral choice on your 2020 tax return, so you have until then to make a final decision.

But if you know that you want to defer payment, make sure to reduce your 2020 estimated tax payments to get that cash in your pocket now.

If you aren’t sure, you can always pay now through estimated tax payments and get the taxes refunded when you file your 2020 tax return.