Category Archives: Tax

IRS Issues Limited Guidance on Payroll Tax Deferral Option

Contributed by Kelly Haab-Tallitsch and Rebecca Dobbs Bush, August 31, 2020

payroll salary accounting payment wages money calculator icon symbol vector

On August 28, the IRS issued Notice 2020-65 providing brief guidance on the payroll tax deferral announced in a Presidential Memorandum issued on August 8th. The Memorandum directed the Treasury Department to issue guidance for a deferral of the withholding and payment of the employee portion of Social Security taxes to be “made available” to employers.  The IRS Notice, with very limited details, establishes the ability of an employer to defer the payroll tax, but leaves many questions unanswered.

Is it Required or Voluntary?

Under the Presidential Memorandum and IRS Notice, the deferral of payroll taxes is optional for employers. There is no penalty for employers that choose not to take advantage of the deferral. The Presidential Memorandum also specifies that the Memorandum does not create an enforceable legal right to a benefit.  In other words, an employee does not have the right to initiate legal action to force an employer to permit the payroll tax deferral.

Which Employees Can Be Eligible for Deferral?

Employers may defer the withholding and payment of the employee portion of Social Security taxes from September 1 through December 31, 2020 for employees that are paid less than $4,000 in a bi-weekly pay period (or the equivalent amount with respect to other pay periods). Eligibility for the deferral must be determined on a pay-period by pay-period basis.  No deferral is available for any bi-weekly pay period in which an employee earns $4,000 or more.

“Deferral” Does Not Mean the Tax Liability is Eliminated

Employers must withhold and pay any deferred taxes ratably between January 1 and April 30, 2021. This means employees would be subject to withholding of the deferred taxes (from the last four months of 2020) on top of regular tax withholding during the first four months of 2021. The Notice provides that an employer may make “other arrangements” to collect the deferred taxes from an employee if necessary, although it is unclear what this means.

Employer Liability

It is important to note that the Memorandum and Notice do not relieve an employer of the obligation to ultimately pay the relevant payroll taxes. Employers remain liable for the payment of deferred taxes regardless of whether an employer is able to collect the deferred taxes from an employee. For example, no specific relief is provided under the Notice to an employer in the event an employee is not employed in the first quarter of 2021 and the employer is unable to withhold the deferred taxes at that time. Interest and penalties will begin to accrue to the employer on any unpaid taxes beginning May 1, 2021.

The Bottom Line

Without additional clarification and guidance, employers deferring payroll taxes this fall run the risk of having to impose what will seem like an additional tax on employees or potentially face other liability next spring. Furthermore, employers should consider the administrative complexity of reviewing employee eligibility on a pay-period basis and the communication required to ensure employees understand they will be subject to additional withholdings before moving forward.

Register Now! Complimentary Webcast: Not Approved For A PPP Loan? What Now?

Your company was not approved for a Paycheck Protection Program (PPP) loan but the bills are still due. There may still be some opportunities available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help keep your company on its feet.

Join labor and employment attorney Kelly Haab-Tallitsch and corporate and banking attorney Andrew Podgorny on Thursday, May 14, 2020 at 1PM CT as they discuss:

  • Employee Retention Tax Credit
  • Payroll Tax Deferral
  • Economic Injury Disaster Loans
  • Tax Credits for Paid Sick Leave and Expanded FMLA​

We hope you can join us for this timely webcast!

You Didn’t Get Your PPP Loan – What Now?

Contributed by Kelly Haab-Tallitsch, April 22, 2020

human character a question mark

The Small Business Administration stopped accepting applications for loans under the Payroll Protection Program (PPP) late last week after quickly reaching the program’s $349 billion limit. Congress is debating appropriating additional funds for the program and businesses shut out last week may get another chance. But in the meantime, employers should consider the other options under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as discussed below.

Employee Retention Tax Credit

An Employee Retention Tax Credit of up to $5,000 per employee is available to an eligible employer whose business has been financially impacted by COVID-19. The refundable payroll tax credit is equal to 50% of up to $10,000 in “qualified wages” paid per employee. The credit is available for wages paid from March 13 to December 31, 2020.

An employer may be eligible for the tax credit for a calendar quarter if the employer has not taken an SBA loan under the CARES Act (i.e., a PPP loan, Economic Injury Disaster loan or other SBA loan) and:

  • the employer’s business is fully or partially suspended by government limiting commerce, travel or group meetings order due to COVID-19 during the quarter, or
  • the employer’s gross receipts are below 50 percent of the comparable quarter in 2019.

The “qualified wages” used to calculate the tax credit differ based on whether the employer has 100 or more full-time employees. If the eligible employer averaged more than 100 full-time employees in 2019, only wages paid to an employee for time that the employee is not providing services due to a full or partial suspension of operations by order of a governmental authority, or a significant decline in gross receipts qualify for the credit. But for employers with less than 100 full-time employees, wages paid to any employees during the period of economic hardship qualify for the credit. “Qualified wages” include cash payments plus the employer portion of health insurance premiums.

Any paid sick leave or paid FMLA under the Families First Coronavirus Response Act (FFCRA) is specifically excluded from “qualified wages” for the Employee Retention Tax Credit, as employers receive a separate tax credit for such paid leave wages.

Employers can be immediately reimbursed for the Employee Retention Tax Credit by reducing their required deposits of payroll taxes by the amount of the credit for the quarter. Eligible employers may also request an advance of the Employee Retention Credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. 

Payroll Tax Deferral

All employers are eligible to defer the payment of the employer’s portion of social security taxes that otherwise would be due between March 27, 2020 and Dec. 31, 2020, with no penalties or interest. Fifty percent (50%) of the deferred amount must be paid by December 31, 2021 and the remainder paid by December 31, 2022.  There is no dollar cap on the wages that are counted in calculating the taxes that may be deferred.

This payroll tax deferral is available to all employers, regardless of size, and there is no requirement to show any specific COVID-19-related impact. However, employers that receive a PPP loan may not defer taxes due after a PPP loan is forgiven.

Tax Credits for Paid Sick Leave and Expanded FMLA

Don’t forget that a tax credit is available to employers with less than 500 employees that provide paid leave to employees as required by the Families First Coronavirus Response Act (FFCRA). These refundable payroll tax credits are available to fully reimburse employers for the costs related to providing qualifying paid leave for reasons related to COVID-19 under the FFCRA.

An employer may claim a tax credit against the employer portion of Social Security taxes equal to 100% of the amount of paid leave provided under the FFCRA. If the amount of the tax credit exceeds the employer portion of the Social Security taxes, then the excess is treated as an overpayment and refunded to the employer. Employers claiming the tax credit will be able to retain an amount of federal employment taxes equal to the amount of the qualified leave wages paid, rather than depositing them with the IRS. An employer may claim the tax credits when filing its quarterly federal employment tax return or request an advance of the tax credits using Form 7200, Advance Payment of Employer Credits Due to COVID-19. Employers must retain records supporting each employee’s leave to substantiate the tax credit.

Employee Retention Credit NOW Available for Many Businesses Financially Impacted by COVID-19

Contributed by Meredith Murphy and Robert Jackson, April 1, 2020

dollar bills in hand

On March 31, 2020, the Treasury Department and the Internal Revenue Service launched the Employee Retention Credit, designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

How to determine if your business qualifies for the Employee Retention Credit:

The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: state and local governments and their instrumentalities and small businesses which take Small Business Loans. If an employer takes an SBA loan under the CARES Act (for example, the Paycheck Protection Program, Economic Injury Disaster Loans, and other SBA loans) the employer is not eligible for the retention credit.

Qualifying employers must fall into one of two categories:

  1. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer’s gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019 they no longer qualify after the end of that quarter.

These measures are calculated each calendar quarter.

Calculating your credit:

The amount of the credit is 50 percent of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before January 1, 2021 are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care.

Determining which wages qualify:

Qualifying wages are based on the average number of a business’s employees in 2019.

  • For employers with less than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
  • Employers with more than 100 employees:  If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

Receiving your credit (perhaps the most important step):

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter.

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Form 7200 can be found on the IRS website.  

Instructions for Form 7200 can also be found on the IRS website.   

It will be critically important that you determine if you will receive more aid using the Employee Retention Credit or using the Paycheck Protection Program, Economic Injury Disaster Loans and Loan Advance, SBA Debt Relief, and SBA Express Bridge Loans. You can learn more about those programs on the U.S. Small Business Administration website.

Senate Passes CARES Act – Bringing Relief to Many of Your Businesses!

We are diligently reviewing the CARES Act for the sections that will most affect small and mid-sized businesses across the country. As we dive ever deeper into the Act, we will post individual section summaries to our web page. We know you are craving information on changes to small business loans and tax policy which could bring some relief to your business so we started with those.

PAYCHECK PROTECTION PROGRAM – FINANCIAL ASSISTANCE THROUGH “FORGIVABLE” SBA LOANS

The CARES Act expands eligibility for small business loans made under section 7(a) of the Small Business Act by enacting a new Paycheck Protection Program (the “Program”). Program loans will be 100% guaranteed by the Federal government. The Program is in effect for the period of February 15, 2020 through June 30, 2020. Read more…

THE CARES ACT IMPACT ON CORPORATE AND BUSINESS TAXES

The CARES Act has several key provisions that are meant to give corporations and business (including sole proprietorships, partnerships and S-corporations) credits, payment delays, loss carrybacks, and interest deductions to help businesses to generate cash flow and liquidity to keep business open and maintain payroll. Read more…

Read all our CARES summaries for businesses

See all our COVID-19 Task Force Content

Tax Breaks for Qualified Disaster Relief Payments to Employees

Contributed by Rebecca Dobbs Bush, March 24, 2020

You have dedicated employees that continue to courageously and diligently work the “front lines” during this time. Or, perhaps you’ve had to furlough or issue temporary layoffs to employees and you want to find some way to ease the burden on them.  Perhaps it’s not out of the simple goodness of your heart. Perhaps it’s because you’re cognizant that self-isolating individuals are on social media more than ever and that everyone seems to be sharing information about the policies employers are implementing during this time.

Regardless of your motivation, when President Trump invoked the Stafford Act on February 13, 2020, he opened the door to a range of possibilities in structuring “qualified disaster mitigation” payments to your employees under Section 139 of the Code.  These payments are advantageous to both employers and employees.  They are not subject to income taxes or payroll taxes.  Yet, an employer is still allowed to claim them as a deduction.

Because it’s not every day (fortunately) that a qualified disaster is declared, there is very minimal clarifying guidance from the IRS.  Instead, the definitions are broad and flexible allowing for reimbursement of expenses that can be considered “reasonable and necessary” as a result of the “qualified disaster.”  Payments cannot simply be income replacement, such as sick, vacation, etc.  The expenses you are reimbursing need to be:

                1) expenses that are not otherwise covered by insurance; and

                2) “reasonably related” to personal, family, medical or housing expenses related to the “qualified disaster.”

There is no stated cap or limit on the amount you can issue as tax-free reimbursement.  Further, the IRS has made clear that if the reimbursement amount is “reasonable,” you do not need to require documentation to substantiate the expense from your employees. 

To illustrate some ideas of reimbursable expense that might be considered “qualified disaster” payments under Section 139, see the following examples:

·         A company sent employees to work from home with a $250 stipend for equipment they need and a $50/month allowance for internet and phone service.

·         A large financial industry employer is paying for branch employees’ transportation costs so they can avoid public transit systems, where they might be exposed to the virus.

·         A smaller company that cannot sustain wage continuation or work from home arrangements, issues all employees on temporary layoff a $1,000 stipend as housing assistance during that time.

·         Finally, another company is reimbursing hourly employees for up to $100 per day in childcare costs.

Each industry is different and addressing different concerns. But so long as they are not designed as a flat-out substitution of regular wages, an employer can be creative in designing tax-advantageous “qualified disaster” payments. 

Legislative Relief for Employers and Their Employees Affected by the Coronavirus Pandemic

Contributed by guest authors Meredith Murphy and Robert Jackson, March 22, 2020

On March 18, the president signed into law H.R. 6201. Division G of the law provides tax credits for businesses that compensate their employees for time off due to the Coronavirus pandemic. The purpose of the law is to help employees.

A tax credit is more valuable than a tax deduction. For example, a $10 credit reduces tax by $10. But the value of a $10 deduction depends on the taxpayer’s tax rate. If that is 36%, the value of the deduction is $3.60.

ADMINISTRATIVE EXPLANATION OF THE NEW LAW

On March 20, 2020, the Treasury Department, IRS and Department of Labor issued Release 2020-57 which provides guidance on how small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees, under the Families First Coronavirus Response Act (Act).

The Release highlights that under the Act businesses with fewer than 500 employees can obtain necessary funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The Act will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways from Release 2020-57

Paid Sick Leave for Workers

For COVID-19 related reasons, employees can receive up to 80 hours of paid sick leave and expanded childcare leave when employees’ children’s schools are closed or child care providers are unavailable.

Complete Coverage

Employers receive 100% reimbursement for paid leave pursuant to the Act.

  • Health insurance costs are also included in the credit.
  • Employers face no payroll tax liability from paid leave.
  • Self-employed individuals receive an equivalent credit.

Fast Funds

Reimbursement will be quick and easy to obtain.

  • An immediate dollar-for-dollar tax offset against payroll taxes will be provided.
  • Where a refund is owed, the IRS will send the refund as quickly as possible.

Small Business Protection

The Act also provides that employers with fewer than 50 employees will be eligible for an exemption when inapplicability of the Act would jeopardize the ability of the business to survive. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. The Department of Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Easing Compliance

  • Requirements are subject to 30-day non-enforcement period for good faith compliance efforts.

Immediate Advantage of Paid Leave Credits

Businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Examples

The Release gives the following two examples for employers:

  • If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date
  • If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

State taxes

These changes have been made only on the federal level. Although states are working to make changes to their own laws, most states have not adopted comprehensive changes. 

What the W-4 is that? Answers to Your Questions about the New W-4

Contributed by Michael Wong, January 8, 2020

The process of filling out the W-4 form, shallow depth of field

Following the 2017 Tax Cuts and Jobs Act, which made major changes affecting taxpayer withholding, the IRS announced it would be redesigning Form W-4. The new W-4 has officially been released, creating confusion and questions (at the time of this article the new federal 2020 W-4 can be found on the IRS website).

First and foremost, employers do NOT need to get all employees to sign a new W-4. According to IRS Publication 15, employers are to remind employees before December 1 each year to submit a new W-4 form if their withholding allowances have changed or will change for the next year. If the employee does not submit a new W-4 form, the company must continue to withhold taxes pursuant to the last valid W-4 that was provided. If the employee has not ever submitted a valid W-4, the company must withhold tax as if the employee is single with no other adjustments.

So, again, just because there is a new W-4 form (that looks drastically different), you do not have to have all of your current employees fill out a new W-4. A W-4 previously filled out by an employee will continue to be good until the employee decides to change their withholdings. The only exception is employees who claim to be exempt from any withholdings (i.e. no taxes withheld at all from wages). As addressed below, employees must complete a new W-4 annually to maintain a full exemption

Employers should ensure that new W-4s are used as follows:

  • New employees. All new employees hired or paid in 2020 are required to use the current year’s W-4 form and applicable state W-4. 
  • Employees who want to change their withholdings. Life can sometimes change quickly, if something happens during the year and an employee wants to change his or her exemptions, adjustments, withholdings or credits, the employee will need to fill out a the new W-4 form and applicable state W-4.  Note, an employee is permitted to complete a W-4 anytime, not only when a major life event happens — this could be as simple as the employee realizing that instead of getting a refund, he or she wants to stop providing an interest free loan to the government.
  • Employees claiming exemption from withholding. All W-4s claiming an individual is exempt from any taxes being withheld expire on February 16th each year. This means, that any employee claiming to be exempt from withholdings, should be reminded to turn in a new W-4 (using the new form) by February 15th and advised that if they do not submit a new W-4, you are required to withhold taxes based on the last W-4 in which the employee did not claim to be exempt or, if the employee has always claimed a complete exemption, the employee will be treated as being single with no other adjustments.

To help employees (and you) the IRS has created an Estimator to help employees determine what they should put on their W-4 at www.irs.gov/W4App

Finally, W-4s have to be filled out for all non-U.S. Citizens (“Aliens”). Resident Aliens should be treated the same as U.S. Citizens when filling out the new W-4. Nonresident aliens should be provided the Supplemental Form W-4 Instructions for Nonresident Aliens, which provides:

  • Non-Resident Aliens cannot claim they are exempt from income tax withholding;
  • Non-Resident Aliens must request withholding as if they are “Single”, even if he or she is married;
  • Nonresident Aliens must still provide a SSN, they cannot enter an ITIN on Line 2.
  • Only certain nonresident aliens who are residents of Canada, Mexico, South Korea, or India may be eligible to claim an additional allowance for the child tax credit. To claim the child tax credit your child must have an SSN valid for employment issued prior to the due date of your tax return (including extensions).
  • Write “Nonresident Alien” or “NRA” in the space below Step 4(c) of Form W-4.

So, while the changes in the tax code and W-4 are championed as creating more transparency and simplifying the accuracy and simplicity of the W-4 form, as with all change it will initially create more confusion and panic, just like Y2K. But don’t worry, 2020 is just the beginning to another new decade.

The Death of Reserved Employee Parking?

Contributed by Sara Zorich and guest author Joe Demko, March 27, 2019

cars in a parking lot

The Tax Cuts and Jobs Act, passed in December 2017, is continuing to hit employers and employees in unanticipated ways. The latest impact is on special parking spaces for executives, employees of the month and employee reserved parking spots. Generally, under the IRS Tax Code (“Code”), an employer is not able to take a tax deduction for qualified transportation fringes (“QTFs”) provided to an employee. This includes parking an employer provides to its employees (i.e., the parking lot where the employees park). However, the Code provides two exemptions allowing the employer to take the tax deduction if they do either of the following: (1) tax the employee for the parking benefit or (2) make the parking available to the public. 

  • Option 1 – Normally the “employee benefit” of parking in the employer’s parking lot would be excluded from an employee’s income. However, if the “employee benefit” is greater than the fair market value limitation under the Code, then that amount must be included in the employee’s income. Obviously, increasing an employee’s taxable income based on the parking spot they use to do their job would be a very unpopular result for the employer’s workforce. 
  • Option 2 – Instead of taxing the employee for the parking benefit, a more popular exception is making the employer parking not only available to employees but also to the general public. However, this exception in not applicable under the amendments to the Code when an employer provides reserved or private parking spots that are only available to employees. If the employer maintains “reserved employee spots” (e.g., for the employee of the month or certain executives) then the employees must be taxed or the employer loses its business tax deduction.

The IRS has issued Notice 2018-99 that allows companies to change their parking arrangement on or before March 31, 2019 for retroactive effect to January 1, 2018. Thus, if you have “employee only” or “reserved spots” you must immediately review either eliminating the reserved spots (if the employer wants to keep the business deduction) or review the tax effect of the QTF and how this will impact both the business taxes and the employee taxes.