December 3, 2020 | Payroll Software | Posted by Ascentis
3 Crucial Issues For HR and Payroll Professionals to Address Before 2021
As this very unusual 2020 draws to a close, the mountain of oddities for HR and Payroll professionals that accumulated to address this once-in-a-century pandemic is also precipitating an accumulation of expiring provisions, reporting challenges, and one-time exceptions which we must all address. Herewith, then, we present a recap of those issues.
Emergency COVID Funding
Just as we are seeing a resurgence in coronavirus spread that has already reached new heights in infection, many of us were not aware that there remains $135 billion of unlent Payroll Protection Program (“PPP”) funds available. While the program technically stopped accepting applications August 8, 2020, the unspent dollars would have made a program renewal much easier to accomplish at a time when pressure is building to renew this program (with modifications) – which, for all its perceived faults, is credited with saving hundreds of thousands of jobs at small businesses earlier this year.
However, in a highly unusual move two weeks ago, outgoing Treasury Secretary Mnuchin opted not to extend several emergency funding provisions from the CARES Act beyond their current expiration date of December 31, despite strong and public pressure by officials of the Federal Reserve to do so. These actions included returning the PPP funds and other money (e.g., the Main Street Lending program supplementation) to the general fund, and leaving an undetermined period when the backstop funding will not be available after the first of the year. This will increase the pressure on the inbound Biden administration, and particularly on Treasury Secretary nominee Janet Yellin, to move quickly to earmark new lending vehicles, as initial unemployment claims begin to rise again, and small business bankruptcies are expected to follow suit.
HCM Implications: Watch the news closely for expected announcements of new programs, including a revised PPP-type program, if not in the couple of remaining weeks of the lame-duck session of Congress, then shortly after the inauguration, early in the year. Experience has taught us that the money available under new programs will go fast, particularly if they contain provisions highly favorable to small business!
The two provisions of the Families First Coronavirus Response Act of 2020 (“FFCRA”; P.L. 116-127) providing paid emergency sick leave and extended paid family/medical leave to COVID-impacted employees expire on December 31, 2020, and at this writing, there is no expectation that they will be extended beyond that date. Employers are reminded that if an employee is out on either type of FFCRA leave, the obligation to continue the federal benefit ends on that date (although the employer certainly may continue the leave under other programs like corporate PTO), and tax credit calculations corresponding to these leave types must not include pay for periods beyond that date. Note that payments employers make to employees in early 2021 may still qualify for tax credits if they are for work periods ending on or before December 31, 2020.
The Work Opportunity Tax Credit has a habit of expiring each December 31, and last year, was saved from extinction by the last-minute passage of the Further Consolidated Appropriations Act of 2020, signed into law on December 20, 2019. It is anyone’s guess as to whether this year’s lame duck status for both houses of Congress and the Presidency will result in a further extension – check your favorite HR regulatory reporting service for updates. According to the Department of Labor, WOTC has been generating about $1 billion in aggregate tax credits for employers across the nation annually.
…And About That Employee FICA Tax “Holiday”
On August 8, 2020, President Trump issued a Presidential Memorandum authorizing a “payroll tax holiday” for the employee portion of FICA-OASDI tax (the 6.2% of wages up to the 2020 limit of $8,537.40) and applicable to wages paid during the four-month period from September 1, 2020 through December 31, 2020. The “holiday” turned out to be a deferral of the tax payment obligation, from tax year 2020 to 2021. Although there were some vague references made to possible forgiveness of these tax amounts in the future, such forgiveness has not materialized. So employers are obligated to collect this deferred employee FICA tax from the last four months of 2020 during the first four months of 2021. On August 28, 2020, the IRS issued Notice 2020-65, clarifying some issues related to the tax deferral, but leaving many questions unanswered.
While this entire “holiday” program was optional for employers, and many employers refused to adopt it, for those that did, the “other shoe dropped” on October 29, 2020, when the IRS published modified W-2 reporting instructions for employers who did adopt the program. They are NOT simple or straightforward:
- The 2020 W-2 form for impacted employees should report social security wages (Box 3, and Box 7 if tips are being reported) as in any other year, but should NOT include in Box 4 (Social Security Tax withheld) any amount of tax deferred from 2020 to 2021.
- This means that Payroll Managers’ “old standby” audit safeguard of checking that “the totals from Boxes 3 and 7, multiplied by 6.2%, should equal the totals in Box 4 – whether by department, cost center or for the EIN as a whole – no longer applies. For employers opting in to the FICA tax deferral, reconciling entries will be needed to balance these boxes on the form W-2, to take into account uncollected employee FICA tax.
- Then, in 2021, employers will be further burdened with a W-2C reporting obligation for each employee who had deferred FICA tax in the last four months of 2020. Per the IRS instructions, “…as soon as possible after completing the withholding of deferred amounts” (i.e., shortly after April 30, 2021), the IRS requires employers to file a form W-2C, Corrected Wage and Tax Statements, for the 2020 tax year for each impacted employee.
- Employers will need to message clearly to employees that they should not panic receiving the unfamiliar W-2C form, nor do they have to incur additional expense with their personal tax filing services (if they use them), because for most employees, the W-2C will not impact their already-filed 1040 personal income tax return. The one exception? If an employee had two or more employers in 2020, and the total FICA tax withheld between those two employers exceeded the annual maximum (of $8,537.40), then that individual is entitled to take a credit against their federal income tax for the excess FICA withheld. This has been the rule for ages. But for 2020 only, for employers who participated in the FICA tax deferral program, employees may not realize that they overpaid FICA and are entitled to a tax credit, based on totaling all 2020 W-2 forms alone. They will have to recalculate their total FICA using the W-2C they receive in 2021 that corrects their previously received 2020 form W-2 from that employer. Employers will likely feel a corporate obligation to fully explain this situation to impacted employees so that they do not inadvertently ignore their W-2C for 2020 and overpay FICA for the year.
- And of course, none of the foregoing instructions address the situation where an employee participated in the FICA tax deferral in 2020 but left the employer in late 2020 or early 2021, and as a result the employer cannot collect the deferred FICA tax from the ex-employee. Handling that situation is still being left to the employers’ available state-specific debt collection alternatives.