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Payroll Tax Year-End Considerations in the Year of COVID-19

As any payroll professional can attest, year-end always holds its own particular twists and turns to confront before closing the year. Sometimes that might be a surprise bonus payment to take into income, lagging taxable expense reimbursements to impute, amended returns that were forgotten about, or even late-year employee requested adjustments.

Of course, 2020 will have all these components—maybe not the surprise bonus—but added to the pile of concerns will be those items that are specific to this year and these circumstances. And, in a particular twist, many of these items will cut across various areas of an organization, not just the payroll department and/or the third-party provider.

Let’s consider a few.

CARES Act Reporting – Employee Retention Credit and Social Security Deferral

This topic can be (and I am sure is) the basis for many similar articles and for a large number of IRS pointers on their Deferral FAQ and ERC FAQ sites, so I will not delve in too deeply here.

Suffice it to say that the complexities of claiming the ERC credits/refunds can be somewhat daunting, but there is generally a clear path to recovery once you have everything agreed and organized. The IRS has revised Forms 941X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, to facilitate the credit and refund process, and these procedures should be followed closely as you approach and enter year-end.

If you use a third-party payroll provider, they should be well versed in how the process must be handled through their system, and I suggest you follow their procedures. If you handle payroll and taxation in house, you may want to consider engaging someone to help with the form completion and IRS submissions, with respect to both the ERC and the Social Security Deferral reporting.

It’s important to note that both programs sunset on 12/31/20, so remember to turn off any triggers in your system that could impact withholding, remitting, and reporting in 2021.

Families First Coronavirus Response Act (FFCRA)

The FFCRA requires employers with fewer than 500 employees to provide paid leave if an employee is unable to work or telework due to circumstances related to COVID-19. While I will not review the paid leave requirements here, it will be important to confirm the proper reporting of the amounts on the employee Forms W-2. These requirements are spelled out in IRS Notice 2020-54, which details that specific FFCRA reporting must be included on the W-2 in Box 14, or on a separate document provided to the employee.

The IRS Notice also provides model language which may be included when supplying additional instructions to the employee. Make sure you connect with your in-house team or third-party provider to properly report FFCRA amounts either on or with the W-2s this year.

State Unemployment Insurance

State unemployment insurance (SUI) is typically a fairly mechanical consideration in the year-end close. The primary areas to analyze were traditionally whether SUI tax rates were properly utilized internally or by the vendor, if amounts were paid timely and accurately, and whether everything will reconcile for SUI and federal unemployment tax purposes.

For 2020, most states provided relief from the impact of regular SUI benefits on an employer’s future unemployment tax rates, as long as the benefits were the result of a specific COVID-19 event. Many states, however, have a catch to that relief: the employer must either request it or be able to identify the COVID-related activity and put in a claim for a waiver of charges.

Also note that the relief provisions for taxable employers often differ from the provisions for non-taxable employers (typically non-profits) which will usually be required to reimburse the state for some portion of all benefits paid, generally 50 percent.

A few state examples to consider:

California: While benefit charges assessed to tax-paying employers can be waived for purposes of impacting future SUI rates (see AB 103), it is incumbent upon the employer to verify those charges and dispute COVID-related benefits on a timely basis, noted as 60 days from receipt of Form DE 428T, Statement of Charges to Reserve Account, plus a potential 60 day extension.
New Jersey: New Jersey is one of the few states on a non-calendar year rate cycle, with the SUI tax rates in effect from July 1 - June 30. As such, employers will not feel an impact on their SUI tax rates until July 1, 2021 at the earliest. New Jersey will waive COVID-related benefits from impacting SUI tax rates but has not yet announced the process to do so.
New York: Regular SUI COVID-related benefits will be charged to the employers’ account and could impact SUI tax rates in 2021 and beyond. There are specific exceptions to this charging methodology, and the regular charges will ultimately be waived if the federal government reimburses New York for the benefits paid. See NYS FAQ.

On a related note, the depletion of state unemployment insurance reserve accounts could ultimately also impact your Federal Unemployment Tax (FUTA) cost. When state reserves run dry, funds are often borrowed from the FUTA system with specific repayment terms. If the loan is not repaid by a set time, then the loan costs are passed onto employers in the state in the form of a reduction in the 5.4 percent credit (against a 6.0 percent FUTA tax) generally received by tax-paying employers. As a result, employers in some states may see an increase from the current net FUTA tax of .6 percent of the first $7,000 in taxable wages sometime in the future, but likely not until 2022.

The bottom line is that, at some point, the challenges faced in 2020 could be reflected in future unemployment costs, both at the state level, as detailed here, and at the federal level if and when states cannot repay any federal loans they take to replenish their funds. As a result, it is important to control what you can in this volatile space.

State Income Tax Withholding

As detailed in my prior article on this matter, which you can access here, 2020 led to several challenges with respect to most employer’s workforces, and in particular an employee’s work location.

While most organizations likely did not change their state income tax withholding and reporting methods to account for the location changes, employees may be surprised when they receive their Forms W-2 in January.

For example, a New-York based employee who has been working at a parent’s house in Florida since March might come to realize the tax impact, and is now asking for a refund from the company because of “erroneous” withholding. Those calls will be coming into the payroll department at some point, and you may want to consider what the organization’s response is going to be. You likely will not want to, and probably cannot, amend 2020 tax reporting, and employees may not be able to get refunds of taxes paid to a state which they left nine months ago…and may not be returning to in some cases.

2021 Preparation

Although this article is about 2020 year-end, this will blend right into 2021 preparation. When planning for 2021, you may want to consider where your employees will be to start the year, what the strategic plan is going forward, and how to get properly aligned for state income tax and state unemployment tax purposes. For those organizations that opted into the employee Social Security deferral, also note that repayments are scheduled to begin in January, so be prepared for that as well.

It is also important to note that there are many other critical aspects to a successful year-end close—some related to COVID-19, many not. Final checks on fringe benefit taxation, test runs of Forms W-2 , reconciliations, and reporting of the employee deferral of social security are all important processes to follow and checks to run as your organization closes the payroll books on 2020 and moves on to 2021…with fingers crossed and Forms W-2c at the ready.

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