Year-End Reporting in 2020: COVID-19 Specific Considerations
Due to government response to COVID-19, employers are facing substantial changes to 2020 year-end tax and payroll reporting. Here's an overview of some of these changes.
Memorandum on Deferring Payroll Tax Obligations:
In August, President Trump signed a Memorandum on Deferring Payroll Tax Obligations to permit deferral of employee Social Security taxes on wages paid from September 1 through the end of 2020. The IRS hasn't yet issued guidance as to the reporting requirements associated with the program. Deferred amounts will be reported on Form 941, and possibly Form W-2. The IRS will need sufficient information concerning amounts deferred to reconcile and collect such amounts from the employer if necessary.
Employers are required to withhold the total taxes deferred for an employee from the employee's wages in equal amounts per pay period from January 1, 2021 to April 30, 2021. This withholding will be in addition to the normal Social Security tax due for 2021 wages paid during the same period, which may cause some questions and concerns.
Example: If an employee deferred a total of $800 in 2020, an employer that has eight scheduled payrolls between January 1 and April 30, 2021, will deduct $100 per pay period from the employee to collect and pay the full amount deferred in 2020.
Note: RUN Powered by ADP® (RUN) enables you to choose whether to participate in the employee Social Security tax deferral. Deferral will not be enabled for your employees automatically; we will need your explicit instruction. If you choose to participate, your employees can choose whether to defer their Social Security taxes for the remainder of 2020 (and pay them in 2021). Before you decide whether to opt-in to the deferral, it's critical that you understand how it works and how the deferred amounts will be repaid. For a summary of guidance, FAQs, and other resources, go here. If you would like to activate this feature, go to the Tax Overview screen in RUN and then click Edit for the Federal Taxes.
Families First Coronavirus Response Act:
In March, the Families First Coronavirus Response Act (FFCRA) was signed into law to require employers with fewer than 500 employees to provide emergency paid sick leave for certain COVID-19 related purposes. The law offers employers tax credits for providing such leave. Employers separately report paid leave wages under the FFCRA on 2020 Forms W-2. The three types of FFCRA sick or family leave must be separately reported (if applicable) in Box 14, or on a separate statement:
- Sick leave wages subject to the $511 per day limit because of care the employee required;
- Sick leave wages subject to the $200 per day limit because of care the employee provided to another; and
- Public health emergency leave/emergency family leave wages.
Coronavirus Aid, Relief, and Economic Security Act (CARES Act):
In March, the CARES Act was enacted to, among other things, allow employers to defer payment of the employer share of the Social Security tax through December 31, 2020. Deferred tax amounts are to be paid over two years, in equal amounts due on December 31, 2021 and December 31, 2022.
State Reporting and Withholding Changes:
Many states automatically adopt, or enact laws to adopt, federal Internal Revenue Code (IRC) changes. But in some cases, states enact legislation to reject federal tax law changes. For example, the CARES Act included a tax exclusion for employer student loan repayment benefits. Employers can contribute up to $5,250 in 2020 toward an employee's student loans, and these payments would be excluded from the employee's income for federal purposes. But unless the state automatically or otherwise adopted that provision, any such payments must be reported on the state W-2 as taxable income.
Withholding Requirements for Employees Working in Other States:
As state and local governments issued stay-at-home orders, many employees worked from home for an extended period. For those employees who normally commuted from another state, this created potential new tax obligations.
States generally have specific rules as to how long an employee can work in the state before their employer is required to withhold state income taxes. These thresholds are often expressed in terms of the number of days present in the state (such as, 14 days in New York), or an earnings amount, or some combination. A number of states have issued guidance regarding income tax withholding for employees who are required to work in a state other than their normal work location due to COVID-19. For example, Alabama and Georgia issued rulings that they would not enforce withholding requirements if employees are temporarily working in the state due to government "work-from-home" orders.
The presence of an employee in a state in which an employer does not have a legal and tax presence (known as "nexus") may also subject the employer to new obligations in any state in which employees are now working from home. This may include state business income tax and sales tax obligations. For example, some states will not seek to establish nexus for any business tax, including sales and withholding tax, solely because an employee is temporarily working from home due to COVID-19. Employers facing these and related questions should consult with appropriate legal and tax professionals.
Other Changes for the 2020 Tax Year:
Other changes for the 2020 tax year include:
Affordable Care Act Reporting Deadline:
The Affordable Care Act (ACA) requires insurers, small employers with self-insured (including level-funded) health plans, and all Applicable Large Employers (those with 50 or more full-time and full-time equivalent (FTE) employees) to report certain information about health coverage to the IRS and provide full-time employees and covered individuals with an annual statement. The IRS recently extended the deadline for employee statements in 2021 to March 2, 2021. Additionally, employers must file the forms with the IRS by March 1, 2021 (or March 31, 2021, if filing electronically).
ACA Compliance in Certain States:
Some jurisdictions have enacted their own reporting requirements related to health coverage, including California, New Jersey, Massachusetts, Rhode Island, and the District of Columbia. If covered by these requirements, employers must still report to the IRS, in addition to reporting to their state. Check your state law to ensure compliance.
IRS Form W-4:
For the 2020 tax year, the IRS released a W-4 Form that included major revisions from the previous version. Employers were required to begin using the new form for all new hires on January 1, 2020. If existing employees wish to adjust their withholding, they must use the redesigned form as well. If employers have a valid 2019 or prior W-4 for an employee, though, they can continue to use that. This means that employers will have to maintain two parallel payroll withholding systems for the foreseeable future.
Due to the added complexity in 2020, employers should consider devoting additional time to planning and executing their year-end responsibilities. To help you get started, visit our Year-End Payroll Guide.