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

Locking In Lock-In Letters in 2020

The Internal Revenue Service (IRS) has announced (in Notice 2020-03) that it is redesigning Withholding Compliance Lock-In Letters 2800C and 2808C to include new instructions as it relates to the redesigned Form W-4 for 2020.

The Tax Cuts and Job Act of 2017 (TCJA) changed withholding calculations by eliminating allowances, and in response, the IRS redesigned Form W-4, Employee’s Withholding Certificate for 2020. The Service is also redesigning the Withholding Compliance Lock-in Letters to reflect these changes. Effective January 1, 2020, TCJA mandated withholding calculations to consider credits, adjustments and deductions to factor a dollar value. The allowance withholding method and the TCJA withholding method use the same tax tables. For now, employers and payroll providers will use the allowance method as directed in the letters they receive to calculate employees’ withholding per pay period. After the lock-in letters redesign is complete, they should follow the new TCJA directions.

Withholding Compliance Lock-In Letters 2800C and 2808C are being redesigned to include the new lock-in rate instructions. Instead of providing the employer with the number of allowances by which withholding would be reduced, the letters will provide employers with the withholding status and withholding rate and any annual reductions to withholding or additional amount to withhold per pay period as a dollar value.

The format shown below is what the withholding instructions will look like on the redesigned 2800C lock-in letter:

  • Withholding Status (Filing Status): Single
  • Withholding rate: Form W-4, Step 2(C), Checkbox (higher withholding rate)
  • Annual reductions from withholding (Form W-4 line 3): $0.00
  • Other income (Form W-4 line 4(a)): $0.00
  • Deductions (Form W-4 line 4 (b)): $0.00

Additional amount to withhold per paycheck (Form W-4 line 4(c)): $0.00

The format shown below is what the withholding instructions will look like on the redesigned 2808C modification letter:

  • Withholding Status (Filing Status): Single (or Married or Head of Household)
  • Withholding rate: Standard withholding rate
  • Annual reductions from withholding (Form W-4 line 3): $0.00
  • Other income (Form W-4 line 4(a)): $0.00
  • Deductions (Form W-4 line 4 (b)): $0.00
  • Additional amount to withhold per paycheck (Form W-4 line 4(c)): $0.00

Until the redesigned Letters 2800C and 2808C are cleared for publishing, the IRS Withholding Compliance Unit will continue to issue the Withholding Compliance Lock-in Letters using the old allowance withholding method and employers should follow the letters as directed.

Employers who have already converted their payroll systems to the new 2020 withholding methods can input values to Step 4(a) and 4(b) as follows:

  • 4(a) – 12,900 for MFJ or 8,600 for all others; and
  • 4(b) – Number of allowances, as specified in the letter, multiplied by 4,300.

For additional guidance see the IRS webpage Updated Withholding Compliance Questions and Answers

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Corona Virus Update

Here are the updates to report since my last COVID-19 blog. First up, the Department of Labor is now, officially, enforcing the paid sick leave and paid family leave requirements of the Families First Act. There was a grace period for compliance and that has now passed.

 

The states are starting to get active with information on withholding taxes and especially on garnishments.  These include:

Withholding Tax:

  • Colorado:  nonresident emergency workers are not subject to withholding for state income tax.
  • Maryland: new guidance notes that the pandemic does not affect the withholding requirements for teleworkers.
  • Massachusetts:  compensation to a nonresident is still sourced to the state if the worker was performing those services within the state immediately before the pandemic and is now performing those services outside the state.

Garnishments: Pennsylvania and Washington are suspending or reducing wage garnishments or tax liens.

Most of the states have COVID-19 sections on their websites for either departments of labor or departments of revenue to assist employers with questions and compliance issues.

To keep up to date with the latest info on the COVID-19 payroll related news items, subscribe to our payroll e-news service, Payroll 24/7 for only $149 per year.

Corona Virus Update

States are working fast and furious to get out their response to the COVID-19 pandemic.  Since my last update blog, Connecticut, Hawaii and Indiana are among the states that have either released or updated the FAQs on their websites with new information on the latest COVID-19 measures.

Some states are offering tax relief in terms of delaying either unemployment insurance payments or withholding tax deposits.  These include: Iowa, Missouri, North Carolina, North Dakota and Texas.  However, Arkansas and Colorado, at this time, are not offering extensions for payments or deposits of withholding taxes.

When it comes to unemployment claims, Ohio, Pennsylvania and Vermont are not charging an employer’s account for SUI benefits claims related to the COVID-19 emergency.

Need more info on the latest for the Corona Virus pandemic and payroll related items?  Today is the last day to register for my webinar tomorrow on all things payroll related to COVID-19 including the Families First Act, the CARES Act (and tax credits), state updates on filing and tax relief and garnishment updates including IRS tax levies and student loans.  Use coupon code BBTK7FCJ at checkout to receive a 10% discount off the $149 registration price.

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.

The Most Common Mistakes People Make With Payroll and How to Avoid Them on a Global Scale

I have a guest blogger today who is addressing general issues for a global payroll.  I thought you would find it very informative. It is submitted by Lingappa Amiyappa, General Manager–Payroll Operations, Paybooks Technologies India Pvt. Ltd. Their website is www.paybooks.in. 

Every business which has employees must have a process in place to handle payroll, deductions, paying taxes to the state and central government, on time. The payroll process must work like a well-oiled engine – it is one of the most under-appreciated aspects of running a business but the most important. Not to mention that when mistakes happen, then the impact on a business can be bad.

The good thing is that most of the common errors which crop up during processing can be avoided by planning well, getting the right tools, and hiring the right people for the job. Training on an ongoing basis will also help payroll specialists keep up with the changes in the tax structure, learn how to catch mistakes early, avoid or fix them as needed.

That said, here is a look at some of the common payroll mistakes and how to avoid them.

  1. Incomplete records: This is one of the major reasons for mistakes in payroll. Though the requirements vary from country to country, employers are required to maintain employee records for multiple years. These should include hours worked, rate of payment, date of disbursement, etc. Having incomplete and less information like misspelt names, wrong ID numbers, etc. can result in penalties as it takes many man-hours to fix these problems.
  2. Incorrect employee classification: With more temporary employees, contractors, and consultants becoming part of the workforce, it is essential for a company to keep proper records. Proper classification makes it easier to send out paychecks as well as determine tax reporting.
  3. Missed deadlines: Since payroll activity is carried out regularly, it is essential that the payroll team marks the calendar for reporting deposits and paying payroll taxes to the central and state governments on time.
  4. Tax-related forms not sent: All employees, especially contractors must receive Form 16s every quarter so that they can file their tax returns. In the process of trying to do payroll and send out information, payroll teams have missed sending these forms out.
  5. Wrong calculations on overtime payments: Companies have guidelines in place on determining overtime pay. If it is not calculated properly, then it can cause problems and unhappy employees. This can happen if the employee classification is wrong. In some cases, the employees don’t get the overtime payment they are entitled to.
  6. Overdependence on software: There are excellent software products which are used to do payroll activities. As always, results depend on the person putting in the information. In the process of trying to do things quickly, some information gets left out and subsequent calculations are incorrect. The software can prompt the user for information, but this may not always be the case.
  7. Unsaved payroll records: Even though requirements vary from state to state, every company should save payroll records for a minimum of 5 to 6 years.
  8. Lack of confidentiality: Payroll teams should not share private and sensitive information with other employees as this can cause disagreements. Only senior managers and people in the payroll department can have access to this information.
  9. Inadequate personnel: Payroll teams should have enough people to carry out related tasks. When there is just one person to do the job and he/she falls sick, the work comes to a stop and causes delays. Not just that, it is always sensible to have back-up systems which can be used in case of computer failure.

 Tips on avoiding errors while doing payroll

 There are many things a payroll processor can do to avoid the errors listed above. Including the following tips into the payroll process will help you note and avoid errors before they creep in. A little care and attention go a long way in making the process fast, accurate and easy.

  • Getting the right tools – Don’t want payroll mistakes disrupting your company and employees? Do some research and find the right payroll and HRIS packages. These must be integrated so that the HRIS manages vital employee information like ID numbers, bank account numbers, wages, hours worked, deductions etc. and these can be used by the payroll system every month to pay wages/salaries. Payroll systems, when synced with the HRIS, will automate tedious tasks. Payroll software does critical tasks such as file taxes, distribute paychecks, automate leaves, etc.
  • Stay current on information – Many payroll errors occur because payroll processors don’t have enough or the most updated information. As laws and tax codes change frequently, it is important for them to stay updated. This is even more important if the organization has a global presence. Requiring payroll admins to do regular checks on employee status and other information can reduce error rate drastically.
  • Analyzing Reports – Payroll software have a reports feature and generating one before sending out paychecks can cut down on mistakes. Getting the following reports will reduce error rate – deductions, payroll register and company’s cash requirements.

If payroll with errors has already been processed, fix it by reporting the error to the tax authorities. Your company may have to pay penalties, but it could get worse if the problem is not fixed. In case of minor errors, you could do one or all of the following:

  • Cancel the current payroll and reissue once updates are done
  • Run payroll manually in addition and adjust only for those employees whose payroll has errors
  • Ensure that corrections have been made so that they don’t occur in the next payroll cycle

Summary

Once payroll errors have been noticed, figuring out where they are and fixing them will ensure a smooth process every pay period. Processing payroll is not the easiest job considering the number of things that must be correct. Incorrect or late payroll can have a big effect on employee morale, so it is important to do it right every time.