Payroll Tax Relief Options for Employers

COVID-19 has created many uncertainties for employers. If you are a business owner or employer, here are payroll tax relief options to consider this year.

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With the new year come new tax considerations, as well as new aid for businesses aiming to stay afloat amid the COVID-19 pandemic. Although 2020 has ended, and even as we enter the vaccination stage, experts suggest that we are still months away from a return to normal, and it will be some time still before economy improves.

As part of the effort to help businesses severely impacted by the coronavirus, the IRS has announced two new employer tax credits designed to take some of the pressure off businesses impacted by cases of sick employees, and employee family members, as well as provide aid to employers who are struggling to pay the bills due to COVID-related government orders.

Those that deferred payroll taxes in 2020 should know what to look out for in 2021, as well as keep an eye on this year’s payroll tax changes and how they might impact businesses.

 

Taking a Look at Payroll Taxes in 2021

The biggest priority change of employer tax relief to look out for is the Social Security wage base increase (i.e. the maximum amount of taxable wage for Social Security), from $137,000 in 2020 to $142,800 in 2021. This means a total of $142,800 of an individual’s wages may be taxable for Social Security.

The FICA tax rate (combined Social Security and Medicare taxes) remains 7.65 percent (6.2 percent for Social Security, 1.45 percent for Medicare), just as last year. This means that 6.2 percent of the first $142,800 of an employee’s wages must be withheld, alongside another 6.2 percent covered by the employer. There is no wage base limit for Medicare, and employers are required to withhold an additional 0.9 percent for wages earned past $200,000 ($250,000 for married couples who file jointly).

If your employee is working multiple jobs, they may ask you to stop withholding Social Security taxes once they’ve reached their wage base limit. Most of the time, you can’t actually do that – but you can inform them that they’ll be eligible for tax credit the following tax season.

 

Did You Opt to Defer Payroll Taxes in 2020? 

If you were among the minority of employers who opted to defer employer and employee payroll taxes last year, then understand that you are obligated to withhold additional wages to pay back the deferred amount on the employee’s share.

To recap: as part of the government’s efforts to provide aid during the coronavirus pandemic, employers were given the option to defer their share of the payroll taxes for the year, with the caveat that half of the total deferred amount would be due by December 31st, 2021, and the other half by December 31st, 2022. This wasn’t a particularly popular employer tax relief effort, and there was bipartisan criticism of its implementation.

The same option was later made available to certain employees, giving them the choice to defer their share of the payroll taxes for the year (provided they earned $4000 in biweekly wages or less, and other eligibility requirements), with the understanding that the taxes deferred during these months (September through to December 2020) would be added to their withheld taxes during the months of January through April 2021.

This means if your employees were eligible for deferred taxes in the last four months of 2020, the amount deferred would have to be paid back in the first third of this year. Furthermore, your first deadline for half of any payroll taxes you opted to defer will be at the end of the year.

However, it’s important to note that with a new administration, the government may handle this employer payroll tax relief differently, if you did opt to defer. This may become a big ticket issue this year as the federal government and military made it mandatory for own employees to defer their payroll taxes. Be sure to discuss this with your tax professional if the deferrals are relevant to your concerns and keep an eye on any developments.

 

New Employer Tax Relief Credit Options This Year

Whether you chose to take advantage of the government’s so-called tax holiday or not, there are other ways for you to seek employer payroll tax relief aid this year, particularly if you are struggling to support employees and employee costs.

Last year, the IRS announced two new employer tax credit options to help businesses who have been hit hard by COVID-19 and need relief. These options were the Credit for Sick and Family Leave, as well as the Employee Retention Credit.

 

- Credit for Sick and Family Leave

These payroll tax relief efforts for employer-provided sick and family leave benefits were meant to coincide with the government’s Families First Coronavirus Response Act (FFCRA), wherein the government required employers with under 500 employees to provide sick and family leave benefits.

Although many people thought that the government’s last relief package for the year (the Consolidated Appropriations Act of 2021, or CAA21) would extend the FFCRA into 2021, it did not.

It did, however, extend the credit for sick and family leave until the end of March 2021 – meaning employers with up to 500 employees are no longer mandated to provide sick and family leave benefits but can receive aid from the government if they choose to provide leave benefits for the first quarter of the year anyway.

Do note that there are stringent documentation requirements to take advantage of the credit, as well as caps in how many benefits are paid out/how long the sick leave or family leave can be, as well as a list of qualifying reasons.

Also keep in mind that the benefits covered by the FFCRA and the Family and Medical Leave Act (FMLA) are separate, meaning that while an employee can’t reset their caps on FFCRA-covered medical and family leave, employers providing medical and family leave in 2021 may still get a tax credit under the FMLA.

 

- Employee Retention Credit

As part of CAA21, Employee Retention Credit eligibility has been expanded to last until June 31st, 2021. It has also been modified – while it initially provided a 50 percent refundable tax credit for companies closed or shut down by government-mandated COVID-19 lockdowns, this has been changed to 70 percent for the first half of 2021.

Because the coronavirus remains a developing issue, and it’s uncertain what the next few months will look like – and because we are on the cusp of a new administration – it’s possible that employer tax credits and payroll tax relief will be greatly expanded in 2021. It’s also possible that no other changes will occur.

If you’re worried about your taxes this year and how they might be affected by the continued pandemic and multiple successive tax updates, consider discussing your options and concerns thoroughly with a tax professional.

How Do the IRS Economic Impact Payments Affect Me?

*Last Updated on March 23, 2021

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When the coronavirus crisis first began, Congress responded by rolling out a number of bills aimed at providing financial aid to individual Americans as well as state and local governments, in order to help subdue the hemorrhaging effects of the virus on the American economy.

One of these bills, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) included IRS Economic Impact Payments, a one-time $1200 cash check to individuals, and $2400 to married couples, with an additional $500 per dependent.

The IRS is responsible for sending these checks out, and has been doing so since April 24, 2020, at a rate of about 5 million checks per week. As of late August, the IRS has released a public statement detailing how many checks they have sent to individuals per state, and it continues to advise taxpayers and citizens who have not yet received a stimulus check to review their eligibility, and understand that checks are still being sent out.

 

What are the IRS Economic Impact Payments? 

The IRS Economic Impact Payments (EIP) are, as of now, a one-time payment of $1200 to every eligible American, and $2400 to married couples, with an additional $500 per dependent. Most taxpaying Americans who are up to date on their tax returns and earn an adjusted gross income of up to:

Are eligible to receive the full EIP and have likely already received their check. Americans with a total adjusted gross income above these thresholds will receive a reduction on their EIP, based on 5 percent of how much more they earn.

Recipients of Social Security retirement, survivor, or disability benefits, Railroad Retirement benefits, SSI, and VA C&P will automatically receive their $1200.

In addition, Non-Filers can also request an Economic Impact Payment by November 21, 2020 if:

Note that you should not use the Non-Filers tool if you will be filing a 2019 return.

 

Who Does Not Qualify for an EIP?

Some taxpayers do not qualify for an EIP. Non-qualifying criteria include:

Other Americans who have not filed tax returns for 2018 or 2019 due to no or low income, and aren’t eligible for the government benefits listed above, are still eligible for an EIP, but must register through the IRS’s website using their non-filer tool. This is important, as the IRS otherwise wouldn’t know to send you a check.

 

How Long Will Economic Impact Payments Be Available? 

Economic Impact Payments will be available by the IRS throughout the entirety of 2020. It is unclear whether that period will be extended should Congress decide to authorize a second round of Economic Impact Payments. Refer to the IRS’s official website on EIPs and the IRS’s news releases for updates or information on second stimulus checks, if or when they’re authorized.

 

Will We Get a Second Round of Economic Impact Payments?

Whether or not taxpayers will receive another round of IRS Economic Impact Payments, or stimulus checks, is a question that Congress has been wrestling with for months. While there is still bipartisan approval for some type of aid, the details of that aid remain completely undecided.

However, the looming threat of rising infections and an unemployment rate of 8.4 percent may push both parties to try and reach a compromise sooner rather than later.

Any aid package will also include unemployment benefits and other forms of aid, as well as the divisive decision on how best to fund state and local government aid, further complicating discussions. Whether a second stimulus check arrives, and how large that check will be, is thus still up for debate. Be sure to check the IRS’s official portal on coronavirus relief for up-to-date information.

 

Why Haven’t I Received My Economic Impact Payment? 

If you are a qualifying taxpayer who is up to date with their tax returns, it may be that the IRS has not gotten around to sending you your check. However, as mentioned previously, some Americans need to take action in order to claim their checks. If you haven’t filed a tax return in two years due to no or low income, enter your payment information through the IRS’s non-filer tool by November 21, 2020.

If you have received a $1200 check automatically as a government benefits recipient without a tax return, but have not received the additional $500 payments per dependent/child, you had until September 30th to register through the same non-filer tool.

 

Economic Impact Payment Cards

Some of the IRS Economic Impact Payments will be sent via a debit card, known as the Economic Impact Payment Card. You cannot specifically request that the IRS sends you your EIP in card form.

Right now, the IRS is sending out EIPs via direct deposit, paper check, or debit card. If you received a debit card, but lost it, you can request a free replacement through MetaBank®’s customer service. MetaBank® is the US Treasury’s financial agent. Please see January 2021 Updates to EIP for more information on payment cards.

 

Other Information to Note

It’s important to note that the IRS will not request information from you via mail or otherwise regarding your Economic Impact Payment, especially personal or financial information. Anyone masquerading as the IRS requesting information in order to send payment is likely a coronavirus scam artist. You must provide your information to the IRS either via previous tax returns, or the IRS’s own official non-filer tool.

 

*October Updates to Economic Impact Payments

On October 23, 2020 the IRS set November 10 as "National EIP Registration Day" to help non-filers. This final push on Economic Impact Payments is to encourage individuals who do not usually file a tax return to register to receive an Economic Impact Payment.

“Our partner groups have been a critical part of the unprecedented IRS outreach and education campaign this year to contact as many people as possible about these payments,” said IRS Commissioner Chuck Rettig. “As a result, millions of Americans have successfully used the Non-filers portal and received their Economic Impact Payment. Registration is quick and easy, and we urge everyone to share this information to reach as many people before time runs out on Nov. 21.”

 

*January 2021 Updates to EIP

A second round of Economic Impact Payments has been issued by the Treasury Department and the IRS. The payments include up to $600 for individuals or $1,200 for married couples and up to $600 for each qualifying child. According to the IRS, "most people who have an adjusted gross income for 2019 of up to $75,000 for individuals and up to $150,000 for married couples filing joint returns and surviving spouses, will receive the full amount of the second payment."

This second round of payments has been scheduled to begin delivery on January 4, 2021.

Direct deposit payments may take several days to reach individual accounts, while paper checks and debit cards have begun being mailed and will continue to be mailed throughout January. These mailed payments will take more time to be delivered than direct deposits.

Millions of second-round EIP payments are being issued as prepaid debit cards to speed up the delivery of payments. These Economic Impact Payment Cards (debit cards) issued by Treasury's financial agent, MetaBank and the IRS does not determine who receives a card.

According to the IRS, cardholders have the opportunity to use the debit card to:

The form of payment to individuals may be different than the first round of stimulus checks. For example, if you received a paper check in the first round, you may receive a prepaid debit card this second round.

To check the status of your EIP, use the IRS Get My Payment tool.

 

*March 2021 Updates to EIP

A third round of Economic Impact Payments have been issued by the IRS. These payments will be issued via direct deposit and through the mail as a check, or debit card. Most taxpayers will receive this third round of stimulus the same way they received the first and second rounds of EIP's.

For most individuals, you will receive $1,400. Those with qualifying dependents will also receive an additional $1,400 for each dependent on their returns.

The latest round of EIP's are based on the taxpayer's latest processed tax return - from 2020 or 2019, and includes those individuals who registered with the IRS' Non-Filers tool.

Those eligible for the third round of Economic Impact Payments include U.S. citizens or U.S resident aliens that have a valid Social Security number and adjusted gross income on their tax return lower than:

To find more information on the third round of stimulus checks, please check IRS.gov or speak to our professionals.

 

Contact a Tax Professional for More Information 

If you’re worried about your stimulus checks, haven’t received your payments, or are unsure regarding eligibility, you can contact a professional tax attorney for more information.

The IRS advises that you do not call or contact them directly with questions regarding Economic Impact Payments. If you cannot find the information you need on their portal and FAQs, a tax professional may be able to provide you with a clear answer.

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How to Navigate Employer Payroll Taxes During Times of Uncertainty

Navigating employer payroll taxes has become more confusing and difficult as we manage the COVID-19 crisis across America. Here's what you should know about payroll taxes during this time of uncertainty.

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As part of the White House’s response to COVID’s economic impact, the President signed an executive order earlier in August giving employers the option to defer their employees’ halves of the payroll tax, effective September 1, 2020, through to the end of the year (December 31, 2020). The U.S. Treasury recently released a memorandum on the executive order providing further guidance.

Employer payroll taxes refer to the 12.4 percent of an employee’s gross pay that goes to Social Security (up to an annual total threshold of $137,700 for 2020) and the 2.9 percent that goes to Medicare (no threshold).

These taxes are covered in part by the employer, and in part by the employee’s own wages, in a 50/50 split.

 

Employer Payroll Taxes and COVID-19

Employers were already given the option to defer their half of the Social Security tax (6.2 percent) back when the CARES Act was first signed into law, from March 27, 2020 to December 31, 2020. To do so, employers would simply report these deferred taxes in their quarterly federal tax report to the IRS (Form 941) and withhold the payment.

Any Social Security taxes deferred this year would then be due incrementally over two years. This means half of the deferred taxes would be due on December 31, 2021, and the other half would be due on December 31, 2022.

With the recently signed executive order, President Trump is now giving businesses the opportunity to let their employees defer their portion of the tax as well, provided their gross pay totals $4000 every two weeks, or less ($104,000 a year). Any employee making more than that is exempt from the tax deferral.

Those that do choose to defer their taxes will be able to collect an additional 6.2 percent and 1.45 percent of their gross pay in cash for the rest of the year. However, they too must pay their deferred taxes back, albeit by a much stricter deadline.

 

A Deferral, Not Forgiveness

The most important thing to realize here is that, regardless of whether employers do or don’t offer this to their employees, it’s ultimately a loan rather than a tax credit or a form of stimulus. While it can help employees who earn less than $4000 every two weeks get a little extra cash to walk around with, it’s up to each employee individually to determine whether they need the extra cash now at the expense of withheld wages in 2021.

The deadline for paying back any employer payroll taxes deferred from an employee’s share of the tax throughout 2020 will be April 30, 2021. Employees who choose to have their portion of the tax deferred throughout the rest of the year will have a portion of their pay next year withheld to pay back those taxes. This can put a dent in an employee’s finances in the first quarter of 2021.

However, for many families, the extra cash can help cover critical expenses as this crisis continues to rage on.

For others, this could be considered a fairly small six-month interest-free loan with steep penalties from the IRS should you find yourself unable to pay back your deferred taxes by April 2021.

 

What the Executive Order Means for Employers

For employers, there’s no additional benefit, and a potential disincentive. One of the issues with the Treasury’s memorandum was that it didn’t offer any particular guidelines to help explain what would happen if an employee parted ways with their company before the April 2021 deadline, after deferring taxes throughout the rest of the year.

The language currently featured in the memorandum heavily implies (and perhaps even establishes) that employers are ultimately on the hook for covering those deferred taxes and must “make arrangements” to withhold and pay the total deferred taxes from the ex-employee’s last paycheck or out of their own checkbook, should an employee leave before covering their total deferred tax liability.

 

What the Order Means for Self-Employed

For the self-employed, the President’s new executive order has no real bearing on their taxes or financial situation. The CARES Act already gave self-employed individuals the right to defer 50 percent of their Social Security tax starting March 27, 2020 until December 31, 2020. To take advantage of this deferral of the other 50 percent, a self-employed individual would have to set up a company and put themselves on a payroll, which may or may not be more trouble than it’s ultimately worth.

 

Talking with Employees About Withheld Wages Next Year

If you have already deferred your half of employer payroll taxes this year and are planning on offering your employees the chance to defer their portion as well, it’s important to make sure your employees understand what that might mean for their wages in the spring.

The 6.2 percent deferred taxes can be a serious boon to someone struggling to get by under the current conditions. The extra cash now may be worth more than a slight cut in wages earlier next year, given things might be looking up by then.

For employers, there are a few issues here to keep in mind.

 

When Must Deferred Taxes Be Paid Back?

To reiterate, the employer’s share of the deferred payroll tax is due in two parts, the deadline for the first half being December 31, 2021, with the deadline for the second half being December 31, 2022. Employer payroll taxes can be deferred from March 27, 2020 to December 31, 2020.

Any employee’s deferred payroll taxes must be paid back in full by April 30, 2021. Employees can opt to have their share of the payroll tax deferred from September 1, 2020 to December 31, 2020. For someone making $3,500 every two weeks, this will put roughly an extra $217 in their pockets on every biweekly paycheck.

However, that also means employers must effectively double their employee’s share of the payroll tax every month in 2021, until the end of April. And for seasonal workers only working through to December, that might mean a hefty cut in their last paycheck to cover their deferred taxes for the new year.

It’s critical that employers discuss this with their employees, while remaining aware that the company will likely be asked to foot the bill should the employee leave. This can be an additional burden on top of the first half of the employer’s deferred taxes from March to December.

 

Final Thought

With all the changes and confusion surrounding employer payroll taxes this year, and possibly years to come, it is a good idea to speak to a tax attorney for advice. They can assist you with managing your IRS payroll tax and help you choose the right course of action.

Need help? Contact our team of specialists today.