IRS Advises on Filing new Form 941-X

The latest version of Form 941-X and its instructions are now in the draft stage. Although scheduled to be finalized in late September the IRS has issued some advice concerning using the form. This advice appeared in the e-news for Payroll Professionals issued on August 25 and states:

The newest version of the Form 941-X (to allow for corrections to the new lines added to the Quarter 2 Form 941) is expected in late September. In the meantime, for 2020:

  1. If adjusting Quarter 1 or earlier, you may use the existing Form 941-X.
  2. If adjusting Quarter 2 (or later) and not making any increase or decrease to the employer share of social security tax or to any of the new COVID-related lines that were added to the Quarter 2 Form 941, the IRS strongly recommends not using the existing Form 941-X, but rather waiting for the new Form 941-X revision to be released.
  3. If adjusting Quarter 2 (or later) and making any increase or decrease to the employer share of social security tax, or to any of the new COVID-related lines, do not use the existing Form 941-X; instead, wait for the new Form 941-X revision.
  4. Please do not send a Form 941 with “Amended” (or similar notation) written on the form.

If you have already done either of 3-4 above, wait for correspondence to find out if the IRS was able to process the tax return or had to reject it. Given the backlog of paper forms and correspondence due to COVID-19, the IRS is unable to estimate when correspondence will go out.

 

Making Sense of COVID-19 FAQs Part 1

Since the pandemic of COVID-19 began I have been getting a tremendous amount of questions about the different tax credits and how those tax credits relate to the Form 941. Although I posted quite a few blog items concerning these credits I thought what I might do now is go through the different FAQs that are on the IRS website and take a closer look at specific information the IRS has provided. Over the next several blogs I will pick one or two of the FAQs and discuss them and how they affect payroll and/or the 941 form. I am not going to be covering them in numerical order but rather picking the ones that I think are the most relevant to the questions I have been receiving. I will give the FAQ number and under what topic they can be found, as well as the link if you want more information. One bad thing about the FAQs on this website is if they do jump around quite a bit. You start off at question four and then must wander off to question 44 to get the remainder of the answer. So, what I am going to try to do is put it all in one place. Today’s blog gets us started with our first question.

Under the IRS topic Covid-19-Related Tax Credits: General Information FAQs. FAQ number 4 deals with documentation. The question reads:

What documentation must an eligible employer retain to substantiate eligibility to claim the tax credits?

In this case the question is asking about the tax credits under the paid family leave and paid sick leave along with the allocable qualified health plan expenses and the eligible employer share of Medicare taxes. In answering this question, the IRS is not giving us any specifics when it comes to the type of records that we need to maintain. They simply list the normal records that we would maintain in a payroll department including Form 941. However, they do refer to another FAQ, specifically number 44 under the IRS Topic Covid-19-Related Tax Credits: How To Substantiate Eligibility And Periods Of Time For Which Credits Are Available FAQs. But to truly answer the question we not only need number 44 but also number 45 and number 46 under this topic.

Number 44 reads: what information should an eligible employer received from an employee and maintain to substantiate eligibility for the sick leave our family leave credits? The answer provided is as follows: An Eligible Employer will substantiate eligibility for the sick leave or family leave credits if the employer receives a written request for such leave from the employee in which the employee provides:

  1. The employee’s name
  2. The date or dates for which leave is requested
  3. A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason
  4. A statement that the employee is unable to work, including by means of telework, for such reason.

In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.

In the case of a leave request based on a school closing or child care provider unavailability, the statement from the employee should include the name and age of the child (or children) to be cared for, the name of the school that has closed or place of care that is unavailable, and a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.

But that still does not tell us exactly what that documentation should look like. That is addressed in question number 45, which reads: what additional records should an eligible employer maintained to substantiate eligibility for the sick leave or family leave credit? This answer gets down to the actual documentation from the payroll system. The employer would need to create and maintain records that include the documentation to show how the employer determine the amount of qualified second family leave wages paid to employees are eligible for the credit, including records of work, telework and qualified sick leave and qualified family leave. The documentation should also show how the employer determine the amount of qualified health plan expenses that the employer allocated to those wages. This of course is in addition to the completed 941 form and any copies of Form 7200. These records could come from your payroll system directly via a report, or if that is not possible, an Excel spreadsheet.

Finally question number 46 deals with record retention time limits. Covid-19 related records fall under the same category as all other employment tax records. This is basically four years plus current.

Making Sense of All the Employer Tax Credits for 2020

The IRS is attempting to provide as much information on the various tax credits available to employers during the COVID-19 pandemic.  In its latest bid to streamline the information, the IRS has issued Publication 5419, New Employer Tax Credits.  The flowchart style publication can be found on the IRS website.  The chart breaks the tax credits into two sections.  The first section is on the Employee Retention Credit portion.  It explains the purpose of the credit…to encourage employers to keep employees on their payroll…the amount of the credit…50%…and who is eligible for the credit…all employers regardless of size, but not governments or businesses who received a PPP loan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 2 of the chart outlines the leave credits for paid sick leave and paid family leave.  This applies to employers with 500 or less employees.

For more info or details on these credits see the IRS website.

Avoiding Common Errors When Filing Form 7200

In news for tax professionals and small businesses, the IRS has advised those who are beginning to deal with Form 7200, Advance Payment of Employer Credits Due to COVID-19 to do so carefully to avoid making error when completing the new form.  Mistakes in completing the form can lead to processing delays, which in turn delays the IRS approving the credits.

Background: The Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security or CARES Act both provide refundable tax credits for the employer.  FFCRA requires employers (of a certain size) to provide paid sick leave or paid family leave.  To offset the cost of this leave, the employer is permitted to take refundable tax credits against employment taxes.  The CARES Act permits the employer to take a “employee retention credit” equal to 50% of “qualified wages”.  This is also offset against employment taxes. However, it is possible for these credits to exceed the employer’s actual tax deposits.  In this case, the employer is permitted to receive the excess paid leave credits or the employee retention credit in advance by using Form 7200.

 

However, the IRS has noted some common errors or mistakes in filling out the form, slowing the process.  The errors to avoid include:

  • Missing or inaccurate Employer Identification Number (EIN). Each EIN on a tax return should be exact.
  • Checking more than one box for applicable calendar quarter. Only one box should be checked for the correct quarter.
  • Check more than one box for Part 1, Line A. Likewise, only one box should be checked in Part 1, Line A.
  • Skipping Part 1, Line B. Complete Part 1, Line B. In Part 1, Line B check either “Yes” or “No”.
  • Not fully completing Part II. Complete all the lines in Part II. This identifies which credits are being claimed.
  • Not completing Part II, Lines 1-8. Part II should be completed using dollar amounts, not the number of eligible employees. All lines in Part II should be completed with an actual dollar amount.
  • Inputting the number of eligible employees on lines in Part 2, instead of dollar amounts.
  • Not checking the math on lines 4, 7 and 8 (i.e., subtracting instead of adding or vice versa)
  • Not signing the form (automatic rejection)
  • Wrong individual signing the form
    • Sole proprietorship—The individual who owns the business.
    • Corporation (including a limited liability company (LLC) treated as a corporation)—The president, vice president, or other principal officer duly authorized to sign.
    • Partnership (including an LLC treated as a partnership) or unincorporated organization—A responsible and duly authorized partner, member, or officer having knowledge of its affairs.
    • Single-member LLC treated as a disregarded entity for federal income tax purposes—The owner of the LLC or a principal officer duly authorized to sign.
    • Trust or estate—The fiduciary.

Also, Form 7200 may be signed by a duly authorized agent of the Eligible Employer if a valid Form 2848 (Power of Attorney and Declaration of Representative) has been filed.

For more information about Form 7200 and its use can be found on IRS.gov: About Form 7200, Advance Payment of Employer Credits Due to COVID-19.

FAQs Keeping Pace With COVID-19 Questions

As questions pour into the Department of Labor and the Internal Revenue Service from employers on the Families First Act and the CARES Act, both agencies are updating their respective FAQs.  Here are the latest updates:

 

Department of Labor:

DOL has added four FAQs, #90-#93, concerning paid family leave or paid leave. These are:

  • FAQ #90 explains whether paid leave requirements under FFCRA apply to temporary workers. A temporary service with over 500 employees is not required to provide leave to its employees. However, the business with fewer than 500 employees where the temporary worker is placed may be required to if it is a joint employer.
  • FAQ #91 addresses whether an employee who has been teleworking is entitled to paid sick or family leave for a school closure when schools have been closed for the past four weeks during the teleworking period. The DOL explains the fact the teleworking employee did not request paid leave during the teleworking period does not exclude the employee from taking such leave.
  • FAQ #92 describes what kind of documentation an employer is permitted to require from an employee who is seeking a medical diagnosis related to COVID-19 symptoms. The DOL explains an employer may require the employee to identify their symptoms and provide a date for a test or doctor’s appointment. However, no further documentation or certification is required. FMLA related leave requests are subject to FMLA documentation requirements.
  • FAQ #93 clarifies that workers who have taken paid sick and paid family leave due to a school closure may not continue to take paid family leave when the school year ends for summer vacation. However, the employee can take paid family leave on the basis that the child’s childcare provider or summer camp is closed or unavailable during the summer due to COVID-19.

Internal Revenue Service:

  • The Internal Revenue Service updated FAQs #64 and #65 regarding the COVID-19 Employee Retention Credit for how eligible employers treat health care expenses.
  • Notice 2020-29 provides for increased flexibility with respect to mid-year elections made under a § 125 cafeteria plan during calendar year 2020 related to employer-sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care assistance programs. The notice also provides increased flexibility with respect to grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020.
  • Notice 2020-33 increases the $500 limit for unused amounts remaining in a health flexible spending arrangement (health FSA) that may be carried over into the following year by making the carryover amount 20 percent of the maximum salary reduction amount under § 125(i), which is indexed for inflation. This calculation had been the basis for the $500 limit under Notice 2013-71, but the $500 limit did not incorporate the indexing. Thus, for 2020, under this new notice the carryover amount will increase to $550.  The notice cross references Notice 2020-29 for guidance on how a § 125 cafeteria plan may be amended to allow prospective health FSA election changes for the 2020 calendar year. Notice 2020-29 provides relief in response to the COVID-19 pandemic that, among other things, permits employers to amend § 125 cafeteria plans to provide participants flexibility to change health FSA contribution elections at such times as the employer permits through the end of 2020, provided that any changes are applied only prospectively.

 

IRS Reminder of COVID-19 Credits

In their latest issue, IR-2020-89, the Internal Revenue Service is reminding businesses of the three new credits that are available to many businesses hit by COVID-19. To recap, these are:

Employee Retention Credit:

The employee retention credit is designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans.

Qualifying employers must fall into one of two categories:

  1. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

Employers will calculate these measures each calendar quarter.

Paid Sick Leave Credit and Family Leave Credit:

The paid sick leave credit is designed to allow business to get a credit for an employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.

The employer can also receive the credit for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, up to $200 per day and $2,000 in total.

Employees are also entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.

Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.

How will employers receive the credit?

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

The IRS has also posted Employee Retention Credit FAQs and Paid Family Leave and Sick Leave FAQs that will help answer questions.

Updates on the implementation of the Employee Retention Credit and other information can be found on the Coronavirus page of IRS.gov.

Related Items:

FS-2020-05, New Employee Retention Credit helps employers keep employees on payroll

COVID-19 Update

The IRS (including the Social Security Administration) holds a monthly payroll profession phone meeting.  Usually on the first Thursday of the month, it was delayed this month due to the COVID-19 pandemic.  It was held yesterday.  As expected, the call centered around the latest updates for the pandemic on the new legislation. Here’s the recap for you:

1. There was a brief discussion on the updates the IRS has released, which include:

  • Notice 2020-21: discusses tax credits
  • Notice 2020-62: retention credits and FAQs
  • Notice 2020-54: HSA adjustments for the pandemic

2. It also discussed the latest forms to be released.  This includes the Form 7200 and its instructions.  This form is used to request tax credits in advance for the Families First Act and the CARES Act.

3. The Form 941 was discussed.  It is in the drafting stage and this draft version should be released by the end of next week.  This will be the form to use for the second quarter and beyond. It is being redesigned to allow for lines to report the various COVID-19 tax credits.  The form will go from two pages to three.  It is still unclear whether or not the Schedule B will be revamped as well.

4. Social Security Administration reminded the attendees that they are also on limited staffing so the employer 800# is not being staffed as it is not able to be accessed remotely by employees.  Employers are urged, instead, to use the email employers@ssa.gov  for any questions they may have.  This can be staffed from home by SSA staff members.  If you have questions on using the Business Services Online (BSO) you should email bso.support@ssa.gov.

The meeting for May will be on schedule and I will have any news from it posted by Friday of the same week.

Coronavirus Update

As I posted in my last blog, many states as well as the federal government are making temporary changes to tax filing deadlines, unemployment insurance requirements and other matters during this pandemic.  The following is a recap of the latest updates that have crossed my desk this week:

Note:  I will be offering a webinar on the payroll related items occurring during this pandemic.  See info at bottom of blog for more details.

Federal: the U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (Labor) announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020. For full details see IRS website’s Coronavirus webpage.

The following states are providing filing or deposit penalty relief or extending deadlines due to the Corona Virus:

 

Unemployment Insurance Update: The following states are waiving waiting times or making other temporary changes:

The following is provided by these states:

San Francisco, California: Workers and Families First Program will provide paid sick leave to impacted workers.

New York: Guaranteed sick leave for New Yorkers under mandatory or precautionary quarantine

I will be offering a webinar/lecture on major impacts that affect payroll professionals due to the pandemic.  It will be held on Friday, April 10, 2020 from 10 am to 11:30 am Pacific time.  More details will be available next week.

Corona Virus Update

The federal and state governments are focusing on providing either tax relief, lost wages relief or updates when employers are affected by the Corona Virus.  This may include delaying reporting or allowing for penalty relief.  It may also include mandatory sick pay, clarification on current sick pay mandates or changes to unemployment insurance qualifications. The following are some of the actions being taken by the IRS or states during this difficult time:

Internal Revenue Service: The IRS has established a special section focused on steps to help taxpayers, businesses and others affected by the coronavirus. This page will be updated as new information is available. This page includes information on (1) Deferring tax payments and (2) High deductible plans covering the pandemic.

So far, the following states are addressing the pandemic:

States Extending Filing Deadlines:

  • California: 60-day filing extension available
  • Maryland: Extend to June 1

State Unemployment and/or Disability:

The following states have suspended the waiting period for unemployment benefits for any employees affected by the Corona Virus: California, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, New York, North Carolina, Rhode Island, Tennessee, Texas, Vermont, and Washington.

Paid Sick Leave Updates or Guidance:

San Francisco: The San Francisco Office of Labor Standards Enforcement (OLSE) has issued guidance regarding the use of San Francisco paid sick leave for situations involving the recent Coronavirus outbreak.

Colorado: Effective March 11, 2020, emergency rules temporarily require employers in certain industries to provide a small amount of paid sick leave (up to four days) to employees with flu-like symptoms while awaiting coronavirus (COVID-19) testing. The DLSS has a webpage dedicated to the emergency rules with further information that will be updated as necessary.

New Jersey: Workers may use sick leave, apply for TDI or apply for Family Leave Insurance due to the Corona Virus.

Washington: Workers who are sick with the virus and have a Certification of a Serious Health Condition form signed by a healthcare provider may be eligible for Paid Family and Medical Leave benefits. The ESD has a comparison guide and a list of frequently asked questions (FAQs) to find out which programs and benefits are available in various circumstances.

As more information comes in for the states, I will update this blog.

Lock In Letter Guidance Updated by IRS

The new Form W-4 just keeps on providing more and more info for us payroll professionals.  We now turn to handling lock-in letters.  The IRS has updated its FAQs to explain how to handle the lock-in letters using the new 2020 Form W-4.  As a quick review on the background of lock-in letters.

If the IRS determines that an employee does not have enough withholding, they will notify the employer to increase the amount of withholding tax by issuing a “lock-in” letter that specifies the withholding arrangement permitted for the employee. The employer will also receive a copy for the employee that identifies the withholding arrangement permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate withholding arrangement. If the employee still works for for the employer, the employer must furnish the employee copy to the employee. If the employee NO LONGER WORKS for the employer, NO ACTION IS REQUIRED. However, if the employee should return to work within twelve (12) months, the employer should begin withholding income tax from the employee’s wages based on the withholding arrangement stated in this letter. The employee will be given a period of time before the lock-in rate is effective to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax withholding. The employee must send the Form W-4 and statement directly to the IRS office designated on the lock-in letter. The employer must withhold tax in accordance with the lock-in letter as of the date specified in the lock-in letter, unless otherwise notified by the IRS. The employer will be required to take this action no sooner than 60 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, an employer cannot decrease withholding unless approved by the IRS.

The new FAQs include:

  • how to handle revised W-4s after the lock-in letter is received
  • How to handle a modification letter
  • Handling employee self service portals and lock-in letter

The site still includes info on how to handle lock-in letters using the 2019 and prior forms.