Due in part to sweeping legislation to respond to the effects of COVID-19, there are many substantial changes to year-end reporting for tax and payroll that you'll need to know for 2020. Here's a preview of what's on the horizon.
Federal Legislation, Social Security Tax Deferments and Year-End Reporting
2020 will be remembered for the dramatic disruptions caused by the COVID-19 pandemic, with significant restrictions to travel and everyday life, threats to individual health and broad economic harm. Federal lawmakers enacted sweeping legislation to offer stimulus and support to individuals and businesses, which helped avoid permanent damage to the economy, but in some cases raised new compliance requirements for employers.
On August 8, 2020, 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. As of mid-August, several elements remain unknown pending IRS guidance. However, it is likely that employers will need to report details related to such deferrals, such as wages paid during the deferral period, and perhaps amounts deferred, on Forms W-2 and 941. If so, this could be a substantial change to payroll systems and annual W-2 tax statements.
On March 18th, the Families First Coronavirus Response Act (FFCRA) was signed into law to require employers with less than 500 employees to pay Qualified Sick and Family Leave to employees who were ill or quarantined, or who needed to care for others. However, the related W-2 reporting requirements were not announced until July 8th, potentially requiring some employers to retroactively re-create records to support the related annual reporting.
In July 8, the IRS notified employers that they must separately report Qualified Sick and Family Leave Wages paid under the FFCRA on 2020 Forms W-2. This reporting is intended to provide employees who are also self-employed with information necessary to properly claim any FFCRA sick or family leave credits. 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 you required;
- Sick leave wages subject to the $200 per day limit because of care you provided to another; and
- Emergency family leave wages.
State Reporting and Withholding Changes
At the state level, employers need to be aware of state conformity with the CARES Act, which was signed into law on March 27, 2020. Many states automatically adopt Internal Revenue Code (IRC) changes, but even those that do sometimes enact legislation to reject federal tax law changes; and other states that don't automatically conform may enact laws to adopt IRC changes. One example in the CARES Act is the 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.
These are just a few of the many changes to employee benefits and payroll reporting compliance requirements that were implemented in 2020.
Withholding Requirements for Employees Working in Other States
State income tax withholding for cross-border commuters became a significant issue because of COVID-19. 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 legal and tax obligations for both employers and employees.
The 42 states that administer an income tax generally have well-known thresholds as to how long someone 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 (e.g., 14 in New York; 30 in Illinois), or an earnings amount, or some combination. In any event, such thresholds have generally been reached, as the global health event and work restrictions have extended from March into August.
At least 14 states 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 to the effect 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 states in which employees are now working from home. This may include state business income tax and sales tax obligations. Some state announcements have addressed this question; for example, noting that the state 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.
Affordable Care Act Compliance in Certain States
The 2017 Tax Cuts and Jobs Act changed the individual mandate tax penalty in the ACA to zero. Some states enacted an individual mandate and tax penalty for their residents to replace the federal mandate. California, Massachusetts, New Jersey, Rhode Island and Washington, D.C. enacted an individual mandate, which also requires employers to report health coverage details to the state. Applicable Large Employers, generally those with over 50 full-time equivalent employees, must still report Forms 1094-C/1095-C to the IRS, in addition to reporting to these states.
New Jersey and Washington D.C. laws were in effect for 2019, so in early 2020, self-insured employers were required to report details of each employee's health coverage. California and Rhode Island are effective in 2020, so employers should be prepared to report employees' health coverage in early 2021. California employers will be reporting to the Franchise Tax Board rather than the Employment Development Department.
New IRS Form W-4
It bears remembering that the IRS Form W-4 was dramatically revised for 2020, with entirely new data elements and related calculations for income tax withholding and eliminating withholding allowances altogether. Instead, employees will adjust their withholding by entering in detailed tax information on the W-4, such as other income, full-year deductions over the standard deduction amount and any child or dependent tax credits.
One problem is that to complete the new W-4, workers will need detailed from their last tax return, and most new hires won't have that memorized. Employers may need to adjust their onboarding process to offer new hires some time and a private room to make phone calls or give them a few days to complete the form at home.
The new Form W-4 remains optional, meaning that if employers have a valid 2019 or prior form W-4 for an employee, they can simply stick with that and employers are obligated to honor it. This means that employers will have to maintain two parallel payroll withholding systems for the foreseeable future.
To learn more about these and other potential tax and compliance issues, like the current state of FUTA, listen to our webinar, Strategies for Surviving Year End Reporting, which is available on-demand. It's your chance to hear from experts on all the year-end report topics as you prepare for 2020.
ADP's IRS 2020 Form W-4 Employer Guide explains the changes to withholding calculations and procedures, and includes a sample letter to send to employees to help them understand the changes. Also, included in this toolkit are FAQs for employers and employees, legislative updates on the IRS form and withholding changes.