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.

IRS Gearing Up to Implement Taxpayer First Act

The Internal Revenue Service today announced several key leadership appointments as work continues implementing major provisions of the Taxpayer First Act. These leadership changes are part of a larger effort underway at the IRS to continue work on the Taxpayer First Act, which includes work to re-imagine the agency’s tax administration and work to improve taxpayer service and enforcement.

These appointments include:

  • Douglas O’Donnell will serve as the new IRS Deputy Commissioner, Services and Enforcement. O’Donnell has been the Commissioner of the Large Business and International Division of the IRS (LB&I) since 2015, where he also served as the U.S. Competent Authority.
  • Among other leadership changes, Sunita Lough will be returning to serve as the IRS Commissioner of the Tax Exempt and Government Entities Division (TEGE). Sunita Lough has served as the IRS Deputy Commissioner, Services and Enforcement, since September 2019. She is returning to her prior position as Commissioner of TEGE, a role she previously held from 2014 to 2019.
  • Nikole Flax will take over as Commissioner of LB&I after serving as Deputy Commissioner of the division since 2017. She has held many key roles at the IRS including IRS Chief of Staff and Assistant Deputy Commissioner for Services and Enforcement, among others.
  • Holly Paz replaces Flax as Deputy Commissioner of LB&I. She is leaving her current role at LB&I as the Director of the Pass-Through Entities Practice Area, which supports all of LB&I with S Corporation and Partnership Specialty teams and the Ogden TEFRA Unit. She has held other key roles at the IRS including serving as the Director of Corporate Issues and Credits in LB&I’s Enterprise Activities Practice Area, among others.
  • Edward Killen has been serving as Acting Commissioner of TE/GE and will return to the role of Deputy Commissioner of TE/GE. Prior to joining TEGE, Killen has held several leadership positions including the IRS Chief Privacy Officer and Senior Advisor to the IRS Deputy Commissioner of Operations Support, among others.

 

IRS Offer Guidance on ERC for 2021

The IRS has released Notice 2021-23 which provides guidance on the employee retention credit provided under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act, as amended by section 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, for qualified wages paid after December 31, 2020, and before July 1, 2021.  Notice 2021-23 amplifies Notice 2021-20 and provides employers with guidance on how to determine their eligibility for and the amount of the employee retention credit they may claim for the first and second calendar quarters of 2021.

 

IRS: What Employers Need to Know About Repayment of Deferred Payroll Taxes

The IRS has provided guidance on the repayment of the deferred employee’s social security.  This guidance was provided in the e-News for Payroll professionals March 26, 2021 newsletter. 

The Background

To give people a needed temporary financial boost, the Coronavirus, Aid, Relief and Economic Security Act allowed employers to defer payment of the employer’s share of Social Security tax. IRS Notice 2020-65 PDF allowed employers to defer withholding and payment of the employee’s Social Security taxes on certain wages paid in calendar year 2020. Employers must pay back these deferred taxes by their applicable dates.

The employee deferral applied to people with less than $4,000 in wages every two weeks, or an equivalent amount for other pay periods. It was optional for most employers, but it was mandatory for federal employees and military service members.

Repayment of the employee’s portion of the deferral started January 1, 2021 and will continue through December 31, 2021. Payments made by January 3, 2022, will be timely because December 31, 2021, is a holiday. The employer should send repayments to the IRS as they collect them. If the employer does not repay the deferred portion on time, penalties and interest will apply to any unpaid balance.

Employees should see their deferred taxes in the withholdings from their pay. They can check with their organization’s payroll office for details on the collection schedule.

How to repay the deferred taxes

Employers can make the deferral payments through the Electronic Federal Tax Payment System or by credit or debit card, money order or with a check. These payments must be separate from other tax payments to ensure they applied to the deferred payroll tax balance. IRS systems won’t recognize the payment if it is with other tax payments or sent as a deposit.

EFTPS will soon have a new option to select deferral payment. The employer selects deferral payment and then changes the date to the applicable tax period for the payment. Employers can visit EFTPS.gov, or call 800-555-4477 or 800-733-4829 for details.

If the employee no longer works for the organization, the employer is responsible for repayment of the entire deferred amount. The employer must collect the employee’s portion using their own recovery methods.

What the IRS Thinks You Need to Know About Repayment of Deferred Payroll Taxes

The IRS published in its e-News for Tax Professionals on March 13th the following guidance on repaying of the employee 2020 deferred social security taxes in 2021.  This update includes the provisions of the American Rescue Plan Act signed by President Biden.

The Coronavirus, Aid, Relief and Economic Security Act allowed employers to defer payment of the employer’s share of Social Security tax. IRS Notice 2020-65 allowed employers to defer withholding and payment of the employee’s Social Security taxes on certain wages paid in calendar year 2020. Employers must pay back these deferred taxes by their applicable dates.

The employee deferral applied to people with less than $4,000 in wages every two weeks, or an equivalent amount for other pay periods. It was optional for most employers, but it was mandatory for federal employees and military service members. Repayment of the employee’s portion of the deferral started Jan. 1, 2021, and will continue through Dec. 31, 2021. Payments made by Jan 3, 2022, will be timely because Dec. 31, 2021, is a holiday. The employer should send repayments to the IRS as they collect them. If the employer does not repay the deferred portion on time, penalties and interest will apply to any unpaid balance.

Employers can make the deferral payments through the Electronic Federal Tax Payment System (EFTPS) or by credit or debit card, money order or with a check. These payments must be separate from other tax payments to ensure they are applied to the deferred payroll tax balance. IRS systems won’t recognize the payment if it is with other tax payments or sent as a deposit. EFTPS will soon have a new option to select deferral payment. The employer selects deferral payment and then changes the date to the applicable tax period for the payment. Employers can visit  EFTPS.gov, or call 800-555-4477 or 800-733-4829 for details.

If the employee no longer works for the organization, the employer is responsible for repayment of the entire deferred amount. The employer must collect the employee’s portion using their own recovery methods.

Join us on March 24, 2021 at 10:00 am Pacific for this information-packed webinar

Be sure to register for our first payroll lecture/webinar of the year.  The topic is the 2021 Form 941 and is being held on Wednesday, March 24th starting at 10:00 am Pacific.  Click here for more details and to register.  Use coupon code CJYFRQA6 at check out to receive a 10% discount as a Payroll 24/7 BLOG FOLLOWER.  The webinar is pending approval by the APA for 1.5 RCHs.

 

2021 Payroll Lecture Series Has Begun

I have schedule my first payroll lecture webinar to kick off the 2021 series.  My first topic is the 2021 Form 941.  The lecture will be held on Wednesday March 24, 2021 starting at 10:00 am Pacific time.  The lecture covers:

  • What’s New for 2021
  • Families First Act: Extension of existing credits into 2021 for Paid Sick Leave and Paid Family Leave
  • CARES Act: Status of  deferring employer’s and employee’s social Security
  • IRS Form 7200: Purpose for the form and how it applies to you in 2021
  • Line by line review of the latest Revised Form 941

Register on my website.  Use coupon code CJYFRQA6 at check out to receive a 10% as one of my blog followers.

The webinar has been submitted to the APA for approval for 1.5 RCHs.

Join us on March 24, 2021 at 10:00 am Pacific for this information-packed webinar

SUI Update

As of today the following states have released or announced their SUI wage bases for 2021.

 

State Wage Base State Wage Base State Wage Base State Wage Base
AK $43,600 KS $14,000 NM $27,000 WI $14,000
AL $8,000 KY $11,100 NV $33,400 WV $12,000
AR $10,000 LA $7,700 NY $11,800 WY $27,300
AZ $7,000 MA OH $9,000
CA $7,000 MD $8,500 OK $24,000
CO $13,600 ME OR $43,800
CT $15,000 MI PA $10,000
DC $9,000 MN RI $24,600/

$26,100

DE $16,500 MO $11,000 SC $14,000
FL $7,000 MS SD $15,000
GA $9,500 MT $35,300 TN
HI $47,400 NC $26,000 TX $9,000
IA $32,400 ND $38,500 UT $38,900
ID $43,000 NE $9,000/24,000 VA $8,000
IL $12,960 NH VT $14,100
IN $9,500 NJ $36,200 WA $56,500

SUI Wage Bases for 2021

It’s that time of year again where we ring out the old year and ring in the new. To ensure that we have our calculations for our state unemployment insurance correct, payroll needs the wage bases for all states where they currently have employees located. The chart below lists the SUI wage bases that have been released so far. I will be updating this blog new wage bases come in.

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.