Deferral of SE tax

[qbteachmt]

Did you read the Link I gave?

"I enter an amount there, but then I go to Line 12 of Schedule 3 to change the worksheet to zero."

@TaxGuyBill Kindly provided a solution. No one makes you try them, of course.

[suesue1]

How will a client know about the social security deferral that will be due in 2 installments - nothing in the client letter informs them. Can't see any edit that adds that information. 

[sjrcpa]

IRS began sending letters this week.

Would be nice to inform your clients at the time you give them the completed return. Also would be nice if the client letter mentioned it.

[sariscpa]

Hey, Lisa, One of my clients got an underestimated tax penalty that's related to this issue.  He had the option to defer his 2020 SE tax but chose not to.  Proseries calculated his 2021 estimated tax payments on 110% of 2020 but did NOT include the amount he was entitled to defer as part of his tax even though he did not defer it.  So his payments were based on $8,537 less than the actual tax for 2020 x 110%.  IRS says he underpaid.  IRS FAQ #22 says

22. Is there a penalty for failure to make estimated tax payments for 50 percent of Social Security tax on net earnings from self-employment for the payroll tax deferral period?

No. For any taxable year that includes any part of the payroll tax deferral period, 50 percent of the Social Security tax imposed on net earnings from self-employment attributable to the payroll tax deferral is not used to calculate the installments of estimated tax due under section 6654 of the Internal Revenue Code. This means that self-employed individuals that defer payment of 50 percent of Social Security tax on their net earnings from self-employment attributable to the period beginning on March 27, 2020, and ending on December 31, 2020, may reduce their estimated tax payments by 50 percent of the Social Security tax due for that period.

Any idea who is correct on this?  IRS or Proseries?

[qbteachmt]

I think it's important to understand the Payment was deferrable. The tax was still owed. It's the due date that could be manipulated under the temporary provision. This is why people whose tax return ended with a refund found that the deferral was not being honored = because they have enough already paid in to cover that tax owed, there was no deferral function that would result in a refundable overpayment.

"This means that self-employed individuals that defer payment of 50 percent of Social Security tax on their net earnings"

Let's understand that the amount he was entitled to defer is moot for him, because he did not defer. The IRS is right: his safe harbor is 110% of his total tax from the prior year. He did not pay that amount.

Also, I think you are misunderstanding "the payroll tax deferral period" which refers to paying 1040ES for the periods from March 27, 2020 to Dec 31, 2020. That means for 2020 ES, the second, third and fourth quarters, for the most part, can be less than otherwise would have been computed, taking into consider the option to defer will be applicable to these payment periods. It isn't applicable to 2021 safe harbor.

It might help to understand this provision. For the self-employed person, to give them parity to employer/employees, the typical employer Social Security component of a FICA deposit would have been owed and payable. The CARES Act provision meant the employer did not have to make that deposit, and even allowed them to defer collecting for that specified period from the employees' wages.

Nothing here applies to 1040 ES for 2021 safe harbor. Remember that the SE tax is still part of taxes Owed. They just optional were not fully Due.

The Estimate is always based on what we know applies and what we project. If you were shooting for safe harbor, and your taxpayer did not defer, then your taxpayer should have used the full 110%

[sariscpa]

I believe your interpretation to be fair, however, it seems illogical to me that the taxpayer should have to pay a penalty for paying their taxes (for 2021) late because they chose not to defer (in 2020.)  Either Proseries agrees or they have an error in the software (it wouldn't be the first time!)  Either way I am going to fight this and I am going to have to answer about 75 IRS notices on this issue.  How do I get an explanation from Proseries as to their error, or a statement from them if they believe there was no error in the calculation?  

[Just-Lisa-Now-]

How much $$ is this est penalty that youre disputing?

[sariscpa]

Most of them are coming to $186.  I have about 50-75 of them!  I guess I don't know how many yet until the notices start to come in.

[qbteachmt]

Your client isn't being penalized for paying late because they chose not to defer. The provision has nothing to do with 2021.

To summarize the ProSeries error: the Safe Harbor computation against 2020 taxes for 2021 estimates used a reduced tax amount, deducting the 50% deferrable amount, even if a person did not defer it and even though that doesn't apply to 2021 at all. That means ProSeries is wrong for any taxpayer, because that provision as you quoted was for paying the amount owed in 2020 against the quarter it was owed in 2020, and this results in not meeting a safe harbor not being a problem, because in 2020, there would be no penalty for paying less with the provision available that you didn't need to pay it all in 2020, anyway.

2020: you owe what you owe, but don't have to pay as you go, because of the CARES Act. If you paid safe harbor and came out less than this target, as long as you did not drop below that deferral amount, you were fine, after all.

2021: Nothing about the CARES Act affects Estimates or safe harbor.

ProSeries using the info for computing 2021 safe harbor would be the error, no matter what the taxpayer chose in 2020.

[sariscpa]

qbteach: You nailed it!  Proseries created the error.  The "cross reference instructions " in Proseries for Form 2210 Line 2 in the 2020 software says "From Schedule SE, line 12 minus line 26...."  I was surprised when I read the IRS instructions for the same line it nowhere says to reduce by Line 26 of Schedule SE.  

I spent 5 hours on the phone with Proseries this morning and have 2 cases open and escalated.  Their position so far is that I should have reported zero on Schedule SE Line 18 and that would have made the estimated tax payments for 2021 calculate correctly.  I tried to explain to them that Line 18 is not a discretionary number and entering zero on that line would be filing a false tax return but they don't get it.  All they know is that the software is "calculating correctly."

Anyone have a good lawyer?

[qbteachmt]

"in Proseries for Form 2210 Line 2 in the 2020 software says "From Schedule SE, line 12 minus line 26....""

"I was surprised when I read the IRS instructions for the same line it nowhere says to reduce by Line 26 of Schedule SE."

Here: https://www.irs.gov/pub/irs-prior/i2210--2020.pdf

Line 2
Enter the total of the following amounts.
IF you file... THEN include on line 2 the amounts on...
1040 or
1040-SR
Schedule SE (Form 1040):
Line 12 minus line 26,

And then, for 2021 safe harbor lookback, to  confirm enough Est was paid in for safe harbor, there are lots of additional adjustments and provisions:

https://www.irs.gov/pub/irs-prior/i2210--2021.pdf

Line 8
To figure your 2020 tax, first add the amounts listed in (1) below, then
subtract from that total amount the refundable credits listed in (2), later,
that are shown on your 2020 tax return

What I see is the mixup of tax year.

For 2020, the amount that should have been paid in for safe harbor is adequate as long as it works with the math of current year/prior year (standard safe harbor provision) Total tax owed minus the SE deferral provision amount, even if not using that option.

For 2021, the only issue is to figure the amount that safe harbor would be based on, not reducing it for SE tax (which was owed and just the payment was the deferral), and adjusting for the various credits that would not be part of 2021.