Mobility Matters

The Shifting Landscape for Employment Tax in 2020, Are Tremors Ahead for 2021?

December 2020 | by Sammi Chin, Erica Stohler, Mindy Mayo, and John Montgomery, KPMG LLP (United States) (KPMG LLP in the United States is a KPMG International member firm)
 
 

The end of the year and the beginning of the next bring a variety of action steps that employment tax and payroll professionals need to take. Though there may be more challenges employers face due to the impact of federal and state rules and practices this year and the  “work-from-anywhere” reality.

The end of the year and the beginning of the next bring a variety of action steps that employment tax and payroll professionals need to take—nimbly and deftly as the landscape has been shifting pretty dramatically this year—to prepare for the onset of the 2020 tax busy season, but also to lay the foundation for the new calendar year that’s coming. The one set of action steps should help to ensure an efficient, timely, and accurate compliance exercise for the 2020 tax year, and the other set should help position employers and employees—and their employment tax and payroll providers—to accurately and timely withhold, report, remit, track, and document during 2021.

As we consider the impact of federal and state rules and practices this year and the “work-from-anywhere” reality, there are some concerns facing employers that have to do with matters such as change in employee residence and/or work locations, rules around telecommuting, government closures, and possible updating to company policies, amongst others.  In addition, we have seen unprecedented changes to work environments and employee work patterns that employers have had to adapt to, quickly, and which affect their tax and payroll obligations and practices, both federal and state.

In this article, we will spotlight some of the key developments in 2020 impacting employers’ employment tax liabilities and responsibilities and payroll systems, and some of the important action steps that will help employers navigate the challenges and opportunities facing them and will help them successfully move forward in this shifting landscape.

Federal Statutory Developments and What Has Changed


First, we will focus on The Families First Coronavirus Response Act (“FFCRA”.)1  This went into effect on April 1, 2020, and will remain effective through December 31, 2020.  There are two types of paid leave discussed in this Act: Emergency paid Sick Leave (“EPSL”) and Emergency paid FMLA (“FMLA+”).  The paid leave provisions available under this Act are applicable to private employers with fewer than 500 employees, public agencies, and (for EPSL only) any other entity that is not private.  For EPSL, employees are eligible from their first day of employment and there are six triggers for the pay that either result in 100-percent pay (capped at $511 daily) or 2/3rd pay (capped at $200 daily).  This leave type can be used for up to 80 hours.  

Employees who have been on the payroll for 30 calendar days are eligible for up to 12 weeks of leave under FMLA and the time can provide up to 12 weeks of leave.  There is only one trigger, and the first two weeks can be unpaid.  The remaining 10 weeks are calculated at 2/3rd rate (capped at $200 daily, or $10,000 in total).

Secondly, we will turn our attention to sections 2302(a)(1) and (a)(2) of the Coronavirus, Aid, Relief and Economic Security Act (CARES Act)2, under which employers may defer deposits of the employer's share of Social Security tax due during the "payroll tax deferral period."  The payroll tax deferral period is from March 27, 2020 and ends on December 31, 2020.  The employer share of Social Security is eligible for deferral under this program, to be returned to the IRS in two tranches.  The first 50 percent of the deferral is due by December 31, 2021, with the remainder of the deferral being repaid by December 31, 2022, in order to be treated as timely (and avoid a failure to deposit penalty).3

Thirdly, another important change in 2020 came with Presidential Memorandum and Internal Revenue Service (IRS) Notice 2020-65.  These allow for a deferral of employee payroll taxes from September 1, 2020 to December 31, 2020; however, any deferral is required to be collected and remitted to the IRS between January 1, 2021 and April 30, 2021.4  Employers that fail to collect and pay any outstanding amounts by May 1, 2020, will be held liable for the tax, penalties, and interest.  It is important to note that while all wages subject to Social Security for this tax year (including wages for which the tax was deferred) should be reported on Form W-2 Wage and Tax Statement (Box 3 and/or 5), only the taxes that were actually withheld (and not deferred) should be reported in the respective boxes (Box 4 and/or 6) to record tax paid.

Impact on Forms

Employers may have to address how they will accommodate new information that may need to be reported on Form W-2.  Some payroll providers may have operational considerations with the multi-state reporting that could be required based on where the employee was performing services throughout the 2020 tax year, due to system and/or timing limitations (which we will discuss below).  

Further, IRS Notice 2020-545 requires employers to separately report Qualified Sick Leave Wages and Qualified Family Leave Wages paid under FFCRA on 2020 Forms W-2, Box 14, or on a separate statement.  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.  There are three types of paid sick or family leave wages that should be separately reported (if applicable) in Box 14:

  • Sick leave wages subject to the $511 per day limit because of care the employee required;
  • Sick leave wages subject to the $200 per day limit because of care the employee provided to others; and
  • Emergency family leave wages up to $200 per day and $10,000 in the aggregate.

The Form 941, Employer’s Quarterly Federal Tax Return, was updated this year to include a variety of new items related to qualified sick and family leave, employee retention credits (“ERC”), Social Security deferrals and advances received from Form 7200, Advance Payment of Employer Credits Due to COVID-19.  Form 941-X and Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, have also been updated to account for the changes and deferrals/credits in effect for tax year 2020. 

State Changes

Since March 2020 many employees have relocated to a different jurisdiction, whether temporarily or permanently.  What does this mean to both employers and employees?

Historically, an employee will typically provide the employer with an updated W-4 or may update their address within the company’s HRIS system to reflect a change in the home or work location.  Employers use this information to update state and local payroll reporting and withholding.  In 2020, employees scattered to new locations, both inside and outside the U.S., which has raised multiple issues:

  • What if the employee does not provide the employer with his or her new home or work location as that employee believed the move to be temporary? 
  • What if the employee provides the data about where he or she has sheltered temporarily but the company is not registered to do business in that jurisdiction? 
  • What if the employee notifies the company that he or she has moved back in April and it is now December?  If the information was not provided timely, should employers go back to correct this? 

Some states have provided specific guidance with respect to payroll reporting and withholding requirements during COVID-19.  However, there are many states that are silent on their position.  To make things even more complicated, employers need to consider reciprocity and telecommuting rules.

Some Typical Scenarios

Scenario 1 – Working from a state that is different than their resident state on file in the HRIS system

The employer should withhold from the work state first, then any incremental tax if the withholding in the resident state is higher and if mandated by the resident state.  This could result in a requirement for the employee to file multiple personal state income tax returns.  Some employers have withheld from the resident state and not the work state which may potentially result in under-withholding in the work state.  In some instances, an employer may have withheld in the employee work state only.  This may not be accurate if the resident state requires a higher amount of withholding.

Scenario 2 – Working from a state that has a reciprocal agreement with the regular work state

The employer should withhold only in the resident state, which is the technically correct approach.  In order to claim reciprocity, an exemption form may be required from the employee, stating that no withholding should occur in the work state and would only be performed in the resident state.  Only a handful of states have reciprocal agreements and these should be researched to determine their applicability.

Scenario 3 – Working from another location in a different state, e.g. parents’ home, siblings’ home, rental apartment, etc.

Employers in general should withhold based upon where services are performed.  What if the employer was not previously registered for corporate or payroll tax?  The registration and timing challenges may result in under-withholding.  In addition, the withholding requirements may differ depending on the duration of the employee’s stay in this location.  This will likely require manual tracking of this new location as well as the length of stay.

Scenario 4 – Working from a state with no state income tax, but primary work state (former resident state) has an income tax

The employer should withhold the incremental tax difference from the employee’s resident state.  However, the employee may raise questions on why this is required as he or she is now working in a state with no state income tax.  If the employee’s residence address has not changed in the HR data, resident withholding may still be required.  The employee should be directed to seek the advice of his or her personal tax return preparer for further guidance.  

Unemployment Tax Issues

In addition to income tax withholding, there are state unemployment tax considerations.  The rules issued by the Department of Labor6 on where an employee should be subject to state unemployment tax are still in effect.  However, one area of concern is the account to which COVID-related unemployment insurance claims are being charged.  Employers should make sure that such claims are not charged to their account. 

They can do this by: confirming all COVID-related claims are properly noted; taking the proper actions required by the state of the employer; and reviewing benefit charge statements and protest as applicable.

Employers: Consider the Following Action Steps

In light of the above scenarios, which may be happening for many organizations, employers should be considering the following for year-end and in preparation for 2021.

  • Are payroll adjustments required to properly capture the correct state reporting and withholding?  Alternatively, will Forms W-2C be issued for any employees that claim they have changed residency?
  • Gathering the relevant data to determine what corporate tax and payroll tax considerations there are for employees working remotely to develop a formalized remote workforce policy.
  • Communicate and implement new policy. This may include implementation of new technology for work location tracking and payroll reporting, putting an approval process in place to restrict jurisdictions where employees can work remotely, income tax and unemployment tax registrations in new jurisdictions, etc.

Conclusion

2020 was a year that brought many issues (in some cases, unexpectedly) to the attention of payroll, human resources, and tax.  Indeed, consider how since March of 2020 organizations have faced a seismic shift in how they view a remote workforce – out of necessity and with little advanced planning.  Most employees who were working from home were working at a home address that had been provided to their employer.  This address was typically within commuting distance of their office location.  But with work-from-home, remote working, and displaced workers, the situation for employers has gotten quite complicated, with adaptations and policy and process changes taking place over the past few months, to adapt to the changed situation.  That is in addition to the typical year-end and preparation-for-the-new-year responsibilities and obligations employers face this time of year.

Based on what has occurred to date with employer credits, employee deferrals, and changes to the Form 941 and Form 941X, we do not anticipate a smooth year-end.  Reconciliation will be key and preparation for employee inquiries once their Forms W2 are received will be necessary.  Looking forward to 2021 and potential changes to employer and employee reporting yet again, there could be another year of uncertainty, filled with challenges, that will see the landscape for employment tax and payroll professionals shift yet some more and require additional pivoting as the changes roll out.

Footnotes:

Public Law No. 116-127 at: https://www.congress.gov/bill/116th-congress/house-bill/6201 .  Also see the Department of Labor webpage “Families First Coronavirus Response Act: Employee Paid Leave Rights,” at: https://www.dol.gov/agencies/whd/pandemic/ffcra-employee-paid-leave .

Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Public Law No: 116-136.

For additional information on payroll tax deferrals, see the U.S. Internal Revenue Service’s (IRS) Frequently Asked Questions webpage at: https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020 .

4 See GMS Flash Alert 2020-382, September 1, 2020.     

For IRS Notice 2020-54, see: https://www.irs.gov/pub/irs-drop/n-20-54.pdf

The U.S. Department of Labor oversees the unemployment insurance system, though the states run the unemployment insurance programs.  From a federal perspective, many of the rules fall under the Federal Unemployment Tax Act and associated regulations.

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