Top 10 Considerations for 2020 Year-End US Payroll
As we perhaps thankfully approach the end of 2020, it is time again to reflect on the past year and plan for the next. For US mobility and payroll departments, it is that magical season of year-end compensation reporting. Here, the hope may be that the usual payroll process will be enough to get the job done efficiently. However, in a year when the dictionary company, Merriam-Webster, has declared “pandemic” as its “Word of the Year” and where use of the word “remote” has increased by 300%, it is probably not surprising that the term “usual” will need further consideration.
To assist mobility and payroll teams as they finalize the US reporting and withholding requirements for their organization’s mobile and cross-border employees, this month’s newsletter provides a top 10 list of payroll matters to review at the end of this unprecedented year.
Working from home became the new norm during 2020. Unfortunately, many companies have found that the actual location of an employee’s “home” and the address on file for payroll reporting purposes were not always the same. In fact, in some cases, the employee may have been working in a different state or country, creating potentially new reporting and withholding requirements for the company.
As payroll requirements may differ based on where your employees are living and working, it is critical that you have a process in place to obtain and verify this data and to understand the payroll tax rules that apply. In addition, having remote workers may create additional complexities.
- If your company does not currently have payroll capabilities in all countries or states where you have employees (domestic or international), you may need to consider the administrative costs of setting up payroll capabilities in these locations.
- The payroll structure for remote workers can vary significantly based on many factors, including whether the change in work location for the employee is temporary in nature or permanent. Accordingly, it is important to understand the specific employee scenario.
- If the company will pay for the travel costs associated with the employee traveling to their physical office of employment, will such payments be taxable? If so, who will pay the tax costs on the taxable travel benefits—the company or the employee?
Given the complexity, it is important to leverage technology and your mobility tax provider to help identify the risks and requirements and to support compliance efforts.
Treatment of disaster relief payments
On March 13, 2020, President Trump declared the ongoing COVID-19 pandemic to warrant a national emergency as defined under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Due to this determination and while the national emergency is in effect, Section 139 of the Internal Revenue Code allows private entities to provide qualified disaster relief payments to individuals on a tax-free basis.
A qualified disaster relief payment includes any amount paid by an employer to or for the benefit of an employee to reimburse or pay “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a qualified disaster. The IRS, in Revenue Ruling 2003-12, provided an example of company paid disaster payments that would not be subject to US federal reporting or withholding requirements. In the example, receipts were specifically not required, but documentation (i.e., a written policy) was used to support the need of company payments for reasonable and necessary expenses that qualify for exclusion under Section 139. Although not required, employee sign-off on the documentation may be important in supporting the position that the payments were in compliance with the exclusion requirements.
The IRS has not provided a list of expenses that could qualify for relief. However, under the COVID-19 emergency, potential categories of reimbursable expenses that may qualify include costs for temporary housing, medical expenses not covered by insurance, and expenses incurred to allow for work from home arrangements. See our November 2020 newsletter for a more expansive list of potentially qualifying expenses.
Qualified disaster relief payments are exempt from federal and most states’ personal income tax for the recipient and are exempt from federal tax withholding, FICA, FUTA, Medicare, and self-employment taxes for all parties if structured properly. Further, qualifying payments are still deductible business expenses for the employer, even though they are not taxable to the recipients.
If you have employees living in one state and working in another, there will likely be payroll complexities that have to be addressed. Here, the general rule is that state withholding and reporting will generally be based on where the employee is physically working. However, there are exceptions to this rule:
- Reciprocity agreements: some states will agree with other states that the reporting and withholding will remain with the resident state. Note that proper payroll documentation is typically required to support this treatment.
- Convenience of the employer rule: a limited number of states (Arkansas, Connecticut, Delaware, Nebraska, New Jersey, New York, and Pennsylvania) will continue to require withholding and reporting for workdays spent in a taxpayer’s “home office” in another state if the individual is assigned to an office in their state.
- COVID-19 related legislation: a number of states have introduced legislation that is designed to ease compliance burdens relating to temporary work from home scenarios.
In the end, the company is responsible for appropriately tracking their employees, understanding these rules and appropriately reporting and withholding for their employees. Tax, penalties, and interest can be assessed to the company if this reporting and withholding is not done correctly.
Deferral of payroll tax obligations
In response to a Presidential directive, the IRS issued Notice 2020-65 on August 28, 2020. This notice allows employers the option to defer the employee portion of Social Security tax (i.e., for 2020, the 6.2% tax on wages up to a cap of $137,700) from September 1, 2020 through December 31, 2020, for eligible employees who earn less than $4,000 per bi-weekly pay period or a pay period by pay period basis.
To pay the deferred amount of the employee portion of Social Security tax, the employer will ratably withhold the amount of Social Security tax deferred from the employee’s paychecks from January 1, 2021 through April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid tax.
If your company participated in this program, you will have items to consider in both 2020 and 2021:
- For 2020, you should include any wages for which you are deferring Social Security tax on the employee’s 2020 Form W-2 (in box 3, Social security wages or box 7, Social security tips). However, any deferred tax would not be reflected in the 2020 W-2 in box 4 (Social security tax withheld).
- In 2021, you will need to file a 2020 Form W-2c (Corrected Wage and Tax Statement) to report the tax that was deferred in 2020 but withheld in 2021.