Back in 2020, deferring your employer share of Social Security taxes seemed like the lifeline your business needed. The CARES Act let you postpone those payments while you figured out how to survive the pandemic. You deferred $200,000 in payroll taxes from March through December 2020.
Fast forward to 2026. That deferred amount was supposed to be paid back – 50% by January 3, 2022, and the remaining 50% by January 3, 2023. But your business never fully recovered. The payments didn’t get made. Now the IRS is sending collection notices, threatening liens and levies for the unpaid balance plus penalties and interest.
Worse, you’re learning that as the business owner with signing authority on the company’s bank account, the IRS can assess the Trust Fund Recovery Penalty against you personally for these unpaid amounts.
I’ve represented business owners dealing with unpaid payroll tax deferrals since the payment deadlines passed. Some businesses made partial payments and got behind. Others made no payments at all, prioritizing rent and payroll over a debt that seemed distant in 2020. Now that distance has closed, and the IRS collection machine has activated.
Understanding the 2020 Payroll Tax Deferral Program
Section 2302 of the CARES Act, enacted March 27, 2020, authorized employers to defer deposit and payment of the employer’s share of Social Security taxes. This applied to the 6.2% employer portion of Social Security tax on wages paid from March 27, 2020 through December 31, 2020.
The deferral didn’t require applications or approval. Employers simply stopped depositing their share of Social Security taxes during the deferral period. Businesses continued withholding and depositing the employee portion of payroll taxes – they couldn’t defer those. But the employer’s 6.2% share could be held back.
For a business with $1 million in wages paid during the deferral period, the employer could defer approximately $62,000 in Social Security taxes. For larger businesses with higher payrolls, deferred amounts reached six or seven figures.
The repayment schedule under the CARES Act required 50% of the deferred amount paid by December 31, 2021 (extended to January 3, 2022 due to the holiday weekend) and the remaining 50% by December 31, 2022 (extended to January 3, 2023).
Self-employed individuals had a parallel deferral for 50% of their self-employment tax liability, with the same repayment schedule.
Remaining Obligations and Current Status
As of January 2026, all CARES Act payroll tax deferrals are past due. Businesses that didn’t make the January 3, 2022 payment owe 50% of their total deferral plus penalties and interest dating back to the missed deadline. Businesses that made the first payment but missed the January 3, 2023 deadline owe the remaining 50% plus penalties and interest.
The IRS is actively pursuing collection of unpaid deferral amounts. These aren’t forgiven debts or negotiable obligations – they’re tax liabilities that were temporarily postponed. Failure to repay triggers the same collection enforcement mechanisms as any other unpaid employment tax.
Penalties for non-payment include the failure-to-deposit penalty under IRC Section 6656. A Program Manager Technical Advice memorandum (PMTA 2021-07) clarified that failure to pay any portion of deferred taxes by the applicable deadline triggers penalties calculated from the original due date – not from the deferral repayment date.
This means if you deferred $100,000 and paid nothing by January 3, 2022, the IRS calculates the failure-to-deposit penalty on the entire $100,000 from when those deposits were originally due in 2020, not from 2022. These penalties compound quickly.
Interest accrues on unpaid balances from the repayment due dates. For deferrals unpaid since January 2022, you’re looking at four years of compounding interest at IRS rates.
How Deferrals Interact With Employee Retention Credits
Many businesses that deferred payroll taxes in 2020 also claimed Employee Retention Credits. The interaction between these two programs creates accounting complexities that confuse business owners.
The ERC is a refundable credit against the employer’s share of Social Security tax. When you claim ERC, you’re essentially getting back Social Security taxes you paid. But payroll tax deferrals let you postpone paying those Social Security taxes in the first place.
Originally, the CARES Act prohibited businesses that received PPP loans from claiming ERC. The Consolidated Appropriations Act of 2020 eliminated this prohibition retroactively, allowing PPP borrowers to claim ERC on wages not used for PPP loan forgiveness.
The PPP Flexibility Act confirmed that businesses with PPP loans could still use payroll tax deferrals – even after loan forgiveness. Having a forgiven PPP loan doesn’t disqualify you from the deferral benefit.
The key interaction: If you deferred payroll taxes and later claimed ERC for the same periods, the ERC refund you received should have been applied against your deferred tax liability. The IRS will match ERC claims against deferred amounts and expect you to use ERC refunds to pay down deferrals.
Some businesses claimed ERC years after deferring payroll taxes. By the time the ERC refund arrived in 2023 or 2024, the deferral repayment deadlines had passed. The IRS expects businesses to apply ERC refunds to unpaid deferrals, but this doesn’t automatically happen – you may need to manually designate the payment.
If you received ERC refunds but didn’t apply them to deferred tax liabilities, the IRS will likely assess penalties for failure to pay the deferrals on time, even though you technically received funds that could have covered the liability.
Installment Agreement Options for Unpaid Deferrals
If you can’t pay the full unpaid deferral amount, installment agreements provide a path to resolve the liability while avoiding immediate levy action.
The IRS treats unpaid payroll tax deferrals like any other employment tax liability for installment agreement purposes. You can request an installment agreement using Form 9465 or by calling the IRS business tax line.
For balances under $25,000, you may qualify for a streamlined installment agreement with minimal financial disclosure required. For balances over $25,000, you’ll need to provide detailed financial information on Form 433-B (Collection Information Statement for Businesses).
Monthly payment amounts are calculated based on your business’s ability to pay. The IRS looks at gross receipts, necessary business expenses, and available cash flow. They’ll require payments that maximize collection within the collection statute of limitations.
The collection statute for deferred payroll taxes runs from the assessment date. Since deferrals were assessed when the repayment deadlines passed (January 2022 and January 2023), the IRS has 10 years from those dates to collect. For the first installment, collection expires in January 2032. For the second installment, January 2033.
Important considerations for installment agreements on deferred taxes:
- Current compliance required. You must be current on all tax return filings and current payroll tax deposits. If you’re behind on 2024 or 2025 payroll tax deposits, the IRS won’t approve an installment agreement for 2020 deferrals until you’re current.
- Trust Fund taxes get priority. Because deferred amounts include employer Social Security taxes (not trust fund taxes), the IRS may require full payment of other trust fund liabilities first before accepting an installment agreement on deferrals.
- Default terminates the agreement. Missing payments or falling behind on current payroll tax deposits defaults the agreement. The IRS can immediately levy after default.
- Penalties and interest continue accruing. While you’re making installment payments, penalties and interest keep accumulating on the unpaid balance. Your balance may grow even while making payments if your monthly amount doesn’t cover accruing interest.
Trust Fund Recovery Penalty Risks
Here’s what catches business owners off guard: the deferred taxes are employer Social Security taxes, not employee withholdings. Under normal circumstances, only employee withholdings (income tax, employee share of Social Security and Medicare) are trust fund taxes subject to the Trust Fund Recovery Penalty under IRC Section 6672.
The employer’s share of Social Security tax – which is what you deferred – typically isn’t a trust fund tax. The IRS can’t usually assess TFRP against individuals for unpaid employer Social Security taxes.
But there’s a critical exception. If your business collected employee withholdings but paid neither the employee withholdings nor the employer share, the IRS can assess TFRP on the employee withholdings. If your business used deferred employer Social Security taxes to pay other expenses instead of using those funds to cover employee withholdings, you’ve created TFRP exposure.
The IRS investigates TFRP liability by examining who had authority over the company’s finances during the periods when payroll taxes went unpaid. Responsible persons typically include:
- Corporate officers with financial authority – CEOs, CFOs, treasurers, or presidents with check-signing authority or control over which bills get paid.
- Owners with operational control – Majority shareholders or partners who control business operations and financial decisions.
- Bookkeepers or office managers with authority to pay bills and make deposits may be responsible persons if they had the power to decide which creditors to pay.
- Third-party payroll services can be responsible persons if they had control over funds and failed to remit payroll taxes.
TFRP equals 100% of the unpaid trust fund taxes. If the IRS assesses TFRP against you personally, they can pursue your personal assets – home equity, bank accounts, retirement accounts, wages – to collect.
The “willfulness” requirement for TFRP doesn’t mean intentional fraud. It means you knew or should have known about the unpaid payroll taxes and either paid other creditors preferentially or recklessly disregarded the obligation. Continuing to pay vendors, rent, or other expenses while leaving payroll taxes unpaid satisfies the willfulness test.
If you receive Letter 1153 (Trust Fund Recovery Penalty Proposed Assessment), you have appeal rights. Responding within 60 days with a written protest preserves your right to an Appeals conference before assessment. Once assessed, TFRP can only be challenged by paying a divisible portion of the assessment, filing a claim for refund, and suing for refund in federal court.
Strategies for Resolving Unpaid Deferrals
Several resolution strategies exist depending on your business’s current financial situation and ability to pay.
Currently Not Collectible status. If your business has no ability to pay – expenses exceed income and there’s no equity in assets – request Currently Not Collectible status. The IRS suspends collection activity, though penalties and interest continue accruing. This works best for businesses that are struggling but still operating, buying time until cash flow improves.
Offer in Compromise. If the business will never generate enough income to pay the full liability within the collection statute, an Offer in Compromise may settle the debt for less than the full amount. The IRS calculates based on the reasonable collection potential – the equity in business assets plus expected future income.
Business OICs are difficult to get accepted because the IRS assumes businesses can increase income or reduce expenses to pay tax debts. You’ll need to demonstrate that the business cannot realistically generate enough to pay the full liability over the remaining collection period.
Penalty abatement requests. While you can’t abate the underlying deferred tax liability, you may qualify for penalty abatement under reasonable cause provisions. If the business experienced continued financial hardship from COVID-19 that prevented repayment despite good faith efforts, document this for penalty abatement requests.
Business restructuring or closure. Some businesses resolve unpaid deferrals by closing operations and dissolving the entity. This doesn’t eliminate the liability – the IRS can still pursue collection from the defunct business’s assets and may assess TFRP against responsible individuals. But it may be the practical reality if the business can’t survive with the tax debt.
Bankruptcy considerations. Payroll taxes generally aren’t dischargeable in bankruptcy, but business bankruptcy can provide an organized framework for winding down operations while the IRS stands in line with other creditors. Chapter 11 reorganization can potentially address payroll tax debts as part of a broader restructuring plan.
Payment from ERC refunds. If you filed ERC claims and are awaiting refunds, notify the IRS that you want ERC refunds applied to unpaid deferrals. The IRS may not automatically apply ERC refunds to deferral liabilities, particularly if the ERC refund is for different tax periods than the deferrals.
Preventing Future Payroll Tax Issues
Whether you resolve current deferral liabilities or not, preventing future payroll tax problems requires systematic changes to how your business handles employment taxes.
Treat payroll taxes as trust fund obligations, not operating capital. The money withheld from employee paychecks belongs to the IRS, not your business. Maintain separate bank accounts for payroll tax funds or implement accounting systems that segregate tax liabilities from operating cash.
Make federal tax deposits timely even when cash flow is tight. The penalties and interest for late deposits exceed any benefit from using the funds temporarily. If you’re short on cash, negotiate with other creditors before skipping payroll tax deposits.
Monitor your business’s tax deposit schedule. Depending on your payroll tax liability, you may be on a monthly, semi-weekly, or next-day deposit schedule. Missing your deposit deadline by even one day triggers failure-to-deposit penalties.
Verify third-party payroll services are making deposits. If you use a payroll service, regularly check your IRS account transcripts to confirm deposits were made. You remain liable even if your payroll service fails to remit taxes.
File all required employment tax returns on time. Form 941 for quarterly payroll taxes, Form 940 for annual unemployment taxes, and state employment tax returns must be filed timely even if you can’t pay the full liability. Filing returns prevents substitute for return assessments and preserves your ability to negotiate payment arrangements.
Contact Silver Tax Group today. We’ve successfully resolved hundreds of cases involving unpaid CARES Act payroll tax deferrals, negotiating installment agreements that keep businesses operating, obtaining penalty abatements for COVID-related hardships, and defending business owners against Trust Fund Recovery Penalty assessments. The IRS isn’t forgiving these deferrals – they expect full payment plus penalties and interest. Our job is structuring resolution strategies that minimize damage to your business and protect you personally from TFRP liability. The deferral deadlines passed years ago, but resolution options still exist.
Common Questions About CARES Act Payroll Tax Deferral and Repayment
- What was the CARES Act payroll tax deferral?
The CARES Act allowed employers to defer their share of Social Security taxes on wages paid from March 27 through December 31, 2020, postponing deposits without prior IRS approval. - When were businesses supposed to repay deferred payroll taxes?
Under the CARES Act, businesses had to repay 50% by January 3, 2022 and the remaining 50% by January 3, 2023. All obligations are now past due as of January 2026. - What happens if I didn’t repay my payroll tax deferral?
The IRS assesses penalties and interest on unpaid deferrals and can pursue collection actions, including liens and levies, like any other employment tax liability. - Can I set up a payment plan for unpaid CARES Act payroll tax deferral?
Businesses can request an IRS installment agreement and provide financial information to resolve unpaid balances over time. - Does claiming Employee Retention Credit (ERC) affect payroll tax deferral?
ERC refunds should be applied to deferred payroll tax obligations, and failing to apply them may lead to additional penalties. - Can business owners face personal liability for unpaid deferrals?
If employee withholdings were not paid to the IRS, responsible persons (e.g., owners with financial authority) may face Trust Fund Recovery Penalty exposure.
