Tax Tuesday: IRS Updates Dependent Care Rules for 2021 and 2022

The Internal Revenue Service today issued guidance on the taxability of dependent care assistance programs for 2021 and 2022, clarifying that amounts attributable to carryovers or an extended period for incurring claims generally are not taxable. The guidance also illustrates the interaction of this standard with the one-year increase in the exclusion for employer-provided dependent care benefits from $5,000 to $10,500 for the 2021 taxable year under the American Rescue Plan Act.

Because of the pandemic, many people were unable to use the money they set aside in their dependent care assistance programs in 2020 and 2021. Generally, under these plans, an employer allows its employees to set aside a certain amount of pre-tax wages to pay for dependent care expenses. The employee’s expenses are then reimbursed from the dependent care assistance program.

Carryovers of unused dependent care assistance program amounts generally are not permitted (although a 2½ month grace period is allowed). However, recent coronavirus-related legislation (the Taxpayer Certainty and Disaster Tax Relief Act of 2020) allowed employers to amend their plans to permit the carryover of unused dependent care assistance program amounts to plan years ending in 2021 and 2022, or to extend the permissible period for incurring claims to plan years over the same period.

Today’s Notice 2021-26 clarifies for taxpayers that if these dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not considered wages of the employee for 2021 and 2022.

Notice 2021-15, issued in February 2021, states that if an employer adopted a carryover or extended period for incurring claims, the annual limits for dependent care assistance program amounts apply to amounts contributed, not to amounts reimbursed or available for reimbursement in a particular plan or calendar year. Therefore, participants in dependent care assistance programs may continue to contribute the maximum amount to their plans for 2021 and 2022.

Wage and Hour Wednesday: DOL Withdraws Trump “Independent Contractor” Rule

Our blog for Wage and Hour Wednesday deals with the Biden administration withdrawing the Independent contractor rule set into motion during the last days of the Trump administration.

In the press released issued this morning:

The U.S. Department of Labor today announced the withdrawal – effective May 6 – of the “Independent Contractor Rule,” to protect workers’ rights to the minimum wage and overtime compensation protections of the Fair Labor Standards Act (FLSA). The Department is withdrawing the rule for several reasons, including:

  • The independent contractor rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
  • The rule’s prioritization of two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
  • The rule would have narrowed the facts and considerations comprising the analysis whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

Withdrawing the independent contractor rule will help preserve essential workers’ rights. The FLSA includes provisions that require covered employers to pay employees at least the federal minimum wage for every hour they work and overtime compensation at not less than one-and-one-half times their regular rate of pay for every hour over 40 in a workweek. FLSA protections do not apply to independent contractors.

In addition to preserving access to the FLSA’s wage and hour protections, the department anticipates that withdrawing the independent contractor rule will also avoid other disruptive economic effects that would have been harmful to workers had the rule gone into effect.

For more information about the FLSA or other laws enforced by the Wage and Hour Division, visit https://www.dol.gov/agencies/whd, or call toll-free 1-866-4US-WAGE.

 

Social Securities BSO Key to Accurate Reporting

In a recent press release, the Social Security Administration (SSA) urged employers to utilize the Business Services Online (BSO) Portal to ensure accurate wage reporting for their employees:

Accurate earnings records are vital to the Social Security Administration and to every worker in the United States. If Social Security cannot match the name and Social Security number (SSN) reported on a W-2, Wage and Tax Statement, to its records, the agency cannot credit the earnings to that worker’s record. When earnings are missing, the worker may not qualify for Social Security benefits or the benefit amount may be wrong.

Historically, approximately 10 percent of the W-2s the agency receives each year from employers initially have mismatched name/SSN combinations. There are a number of reasons why reported names and SSNs on W-2s may not match with Social Security’s records, such as typographical errors, unreported name changes, and inaccurate or incomplete employer records. By using more than twenty automated matching routines the agency can identify commonly occurring errors that, when corrected, allow the accurate crediting of reported earnings to the correct worker’s earnings record.

Social Security works hard to educate employers—large and small, at the national and local level—about the importance of accurate wage records and the free tools available to them. The agency works closely with the payroll provider community through organizations such as the American Payroll Association and the National Association of Computerized Tax Processors. Agency employees speak at the Internal Revenue Service’s Nationwide Tax Forums and participate in quarterly meetings with Reporting Agents (large third-party filers). Social Security’s Employer Services Liaison Officers and Public Affairs Specialists educate small business employers throughout the nation through local engagements.

In all of the activities, the agency includes information about its online suite of services, Business Services Online (BSO), at www.ssa.gov/bso/bsowelcome.htm. The tools included in BSO provide employers the opportunity to correct errors before, during, and after the development and submission of their wage reports. These tools include:

AccuWage: Software that tests the accuracy of wage reports before submission by identifying common formatting errors.

Social Security Number Verification Service: A free service to verify that all employees’ names/SSNs match the Social Security Administration’s records before submission.

View Name and Social Security Number Errors: A service for electronic wage reporters to view the processing status and errors (including name and SSN mismatches) after their submission.

“It is extremely important that the Social Security Administration has accurate earnings records for workers throughout the country, and this begins with accurate wage reports from the nation’s employers,” said Andrew Saul, Commissioner of Social Security. “I encourage all employers, large and small, to use the free tools on our Business Services Online portal. The earnings record of every worker determines their future eligibility and the amount of Social Security benefits they will receive, so accuracy is vital.”

Commissioner Saul also made the decision to discontinue mailing employers educational correspondence (EDCOR) notices to focus agency efforts on making it a better, easier, and more convenient experience for employers to report and correct wages electronically. EDCOR notices inform employers that name/SSN combinations on a submitted W-2 cannot be matched to Social Security’s records and provides instructions on how to correct the mismatches using tools on BSO. The agency also will continue to seek out new opportunities to educate employers and provide modernized software for electronic wage reporting that informs wage reporters of certain errors in real time as they upload their wage reports.

In addition to Social Security’s work with employers, the agency encourages workers to view their personal earnings records, and submit corrections, online by creating a my Social Security account at www.ssa.gov/myaccount.

Through their my Social Security account, people can check personal information and conduct business with Social Security. If they already receive Social Security benefits, they can start or change direct deposit online, request a replacement SSA-1099, and if they need proof of their benefits, they can print or download a current Benefit Verification Letter from their account.

People not yet receiving benefits can use their online account to get a personalized Social Security Statement, which provides earnings information as well as estimates of future benefits. Residents of most states may request a replacement Social Security card online if they meet certain requirements.

The portal also includes links to information about other online services, such as applications for retirement, disability and Medicare benefits.