An Update on The Self-Employed Tax Deferral

If you are self-employed, you may have taken advantage of the 2020 CARES Act. You will recall that the act provided tax relief from the economic stress of the COVID-19 pandemic. Employers were allowed to defer payment of their share of Social Security for part of the 2020 tax year. 

That tax relief was also passed on to self-employed individuals, who were allowed to defer up to half of their Social Security portion of their self-employment tax. That deferral did not include Medicare. Also, tax deferral only postpones payment. As we shall see, the deferred Social Security taxes must be paid, but can be spread over two tax years.

Calculating the Self-Employed Tax Deferral

The timeframe of the deferral began March 27, 2020 and ended December 31, that same year. If you took advantage of the full amount of Social Security payment deferral, use this formula to calculate the amount you must pay back:

Step 1: Multiply your 2020 income by .775. (That’s the IRS-accepted percentage of the year from March 27 to December 30, 2020.)

Step 2: Multiply the result of Step 1 by .9235 (That’s what the IRS regards as the taxable amount of self-employed income.)

Step 3: Multiply the result of Step 2 by .062. (That’s half of the 12.4% for Social Security that self-employed taxpayers can defer during the period covered by the CARES act.)

Say your income for the taxable period was $65,000. Doing the math above would result in a maximum deferral of $2,884. You could have chosen to defer all, none, or just a part of that amount. If you had no outstanding tax liability at the time of filing, you could not choose to defer, because you would have already paid your self-employment taxes in full. If you owed less than the maximum deferral for self-employment tax payments, you could only have deferred the outstanding liability.

How the Repayment Process Works

You must repay the full amount of any taxes you choose to defer. The good news is that payments can be spread over the 2021 and 2022 tax years. If you deferred the maximum amount, half of that amount was due by December 2021. Any remaining amount is due by December 31, 2022. 

If you choose to defer just a part of the maximum deferral amount, any excess of 50% of that amount will be due for 2021, with the remaining 50% due in 2022. To simplify the math, let’s say your Social Security deferred tax amount was $3,000, but you deferred $2,000 of that amount.  Using the excess of 50% for 2020 and the remaining 50% for 2022, you would owe $500 for 2021 and the remaining 50%, $1,500 for 2022.

Two More Self-Employment Tax Referral Facts You Should Know

If you have paid self-employment taxes for 2020, don’t consider that a tax credit or a retroactive refund trigger. By paying your taxes, you opted out of the deferral.  Likewise, you cannot defer your 2021 self-employment taxes. The program expired on December 31, 2020 and as of this writing has not been reinstated.

Some 2018 TCJA (Tax Cuts and Jobs Act) Self-Employment Tax Cuts Are Going Away

Some TCJA deductions for the self-employed have either been eliminated or changed. Don’t look for them on your self-employed tax statement. Those deductions include:

• The deduction for some entertainment and fringe benefits
• The deduction for employee’s parking, mass transit, or commuting expenses
• Domestic production activities deduction
• The deduction for local lobbying expenses 
• A reduction in the state and local tax (SALT) deduction to $10,000 ($5,000 in the case of married filing separately)—Previously, taxpayers in high-income-tax states could write off 100% of state and local taxes. (That cap is due to expire in 2025.)
• Deduction for settlements in sexual harassment cases, when the settlements are subject to a nondisclosure.

Take Advantage of Tax Deductions for the Self-Employed

Self-employment taxes refer to the Medicare and Social Security payments freelancers, independent contractors, and small-business owners must pay. The self-employment tax rate is 15.3% total—12.4% and 2.9% for Social Security and Medicare. You can deduct the following expenses in connection with your self-employment:

Deduction for Home Office Expenses

You can deduct housing expenses such as utilities, interest paid on your mortgage and property taxes if you have a home office used exclusively for your business. See IRS publication 587 for rules governing the business use of your home.

Deduction for Health Insurance Premiums

Self-employed taxpayers who pay premiums for their health insurance can deduct premiums paid by the taxpayer, spouse and dependents younger than age 27. See the Self-Employed Health Insurance Deduction Worksheet in IRS Publication 535.

Regular Business Expenses

Self-employed taxpayers can write off a number of regular business expenses in connection with travel, meals, vehicle use, business insurance, as well as startup and capital equipment costs. See IRS publication 535 and this Investopedia article for details.