Tag Archives: Taxes

Guidance On Payroll Tax Deferral Creates As Many Questions As It Answers

08/29/2020 – Last night the IRS Issued Notice 2020-65 dealing with the employee social security tax deferral announced by the president on August 8, 2020, in a Memorandum to the Secretary of State.  The Memorandum directed the Secretary of the Treasury to use his authority, pursuant to section 7508A of the Internal Revenue Code, to defer the withholding, deposit, and payment of certain payroll tax obligations. These obligations are the employee portion of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a).

While the notice answers some questions it still leaves many questions unanswered and the deferral period starts only a few days from now.

What We Know From the Notice:

The deferral period is Sept 1, 2020 thru December 31, 2020 and it applies only to eligible employees that earn less than $4,000, bi-weekly or the equivalent amount based on their pay period, calculated on a pre-tax basis.

For qualifying workers, the deferral applies to the employee’s portion of Social Security taxes. This is the 6.2% of the total 7.65% of FICA taxes withheld from employees. The deferral does not affect the 1.45% that is designated for Medicare.

The Notice defines Affected Taxpayers not as employees, but as employers!  It goes on to say  “An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.” This means the repayment obligation is the responsibility of the employer and that the employer will be responsible for any interest and penalties on amounts not repaid.

It also makes clear that it is the employer’s responsibility to collect these deferred taxes from employees who participated in the deferral.

What We Don’t Know From the Notice:

The Notice doesn’t address what happens when an employee leaves the company or doesn’t make enough money to ratably pay back the tax, but it would appear that the obligation to make those payments remains with the employer.

It’s also fails to explain how this will be reported for tax purposes. We can only assume we’re going to see a revamped version of Form 941 (that’s a payroll tax form).

Also missing are any provisions for the self employed and it appears that self employed individuals have been purposely excluded.

Another very important missing item is a clear answer to the question of whether or not the deferral is optional, and if so, is it optional on the part of the employer or employee? While Treasury Secretary Mnuchin, has said that it would be optional, the notice contained no reference to this statement by the Secretary.

As you can see this notice is not the clear definitive statement that anyone wanted and with only days left until the deferral is scheduled to go into effect, those of us in the tax profession are left to argue over how we think things will shake out with very few definitive answers to many tough questions.

Door to unknown

Reference material

Notice 2020-65 https://www.irs.gov/pub/irs-drop/n-20-65.pdf

Presidential Memorandum on Deferring Payroll Tax https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

Forbes https://www.forbes.com/sites/kellyphillipserb/2020/08/28/questions-remain-after-irs-rolls-out-guidance-on-payroll-tax-deferral/#2a70a9485f7c

IRS https://www.irs.gov/newsroom/guidance-issued-to-implement-presidential-memorandum-deferring-certain-employee-social-security-tax-withholding

Federal Payroll & Tax Withholding Effects Covid-19 and the CARES Act

The CARES Act has the following provisions effecting the federal taxes on payroll and payroll tax withholding. These provisions deal with employer payments for student loan repayments, as well as changes in terms of permitted benefits under health savings accounts (HSAs), Archer Medical Savings Accounts (MSAs), health flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). Other federal withholding provisions of interest to employers during the COVID-19 public health emergency include employer-provided disaster relief payments and donate leave programs.

Each of these provisions are outlined below:

  • Employers may provide student loan repayment assistance

The CARES Act allows employers that provide student loan repayment benefits to employees to do so on a tax-free basis and such payments may be excluded from the employee’s income. This benefit is available through Dec. 31, 2020.  The payment is subject to the same $5,250 annual cap available under Code Sec. 127 for tuition, books, fees and supplies.

  • Benefit plan provisions amended during COVID-19

The CARES Act ensures individuals are able to use all tax-favored health care accounts, like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), to buy over-the-counter medicines tax-free without a prescription. This change would apply for amounts paid or expenses incurred after Dec. 31, 2019. In addition, Sections 3703 and 3704 explain that high deductible health care plans with HSAs will be able to provide coverage for telehealth services without having to satisfy the plan’s minimum deductible.

  • Employer may provide disaster relief payments

Due to the Presidential Disaster declared for all 50 states for Covid-19, employers may make qualified disaster relief payments to employees impacted by the COVID-19 public health emergency. Qualified disaster relief payments, under this provision, made to an employee by an employer may be excluded from the employee’s taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair/replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.

  • Employers may administer a donated leave program

Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met.  Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met.  Amounts paid to medical emergency leave bank recipients are taxable employee compensation and subject to FITW, FICA, and FUTA. Employees who surrender or deposit their time in the leave bank do not realize any income and incur no deductible expense or loss

  • COVID-19 added as adverse condition for foreign income and housing exclusions.

Waives the required residency period for qualifying individuals with a tax home in a foreign country to use the foreign income and housing exclusion. The law added to the already existing conditions for waiver for Covid-19. For 2019 and 2020, for purposes of Code Sec. 911(d)(4), the coronavirus pandemic (“COVID-19 Emergency”) is an adverse condition that precluded the normal conduct of business as follows: (1) in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of Dec. 1, 2019; and (2) globally, as of Feb. 1, 2020. The period covered by Rev Proc 2020-27 ends on July 15, 2020, unless an extension is announced by the Treasury and IRS.

  • IRS revises trust fund penalty assessment procedures

Due to Covid-19 and the shutdown of many IRS offices and services centers the IRS is directed to delay the assessment of the trust fund penalty on individuals responsible for the collections and payment of payroll taxes withheld and not deposited to the U.S, Treasury. Said delays are only available when no imminent statute or exigent circumstances exist.

  • IRS provides deadline relief for correcting employment taxes and other time-sensitive actions.

Deadlines extended to July 15. The IRS has now postponed deadlines for certain specified time-sensitive actions on account of the ongoing COVID-19 pandemic.

Notice 2020-35, 2020-25 IRB extends tax deadlines to July 15, 2020 for the following: (1) employers correcting employment tax reporting errors using the interest-free adjustment process; and (2) employers correcting employment tax underpayments or overpayments.

  • IRS provides guidance on leave-sharing program to aid COVID-19 victims

Under an employer leave-based donation program, employees elect to forgo vacation, sick, or personal leave in exchange for cash payments an employer makes to organizations described in Code Sec. 170(c).

The IRS will not consider any cash payments an employer makes to a Code Sec. 170(c) organization in exchange for vacation, sick, or personal leave that employees donate to be gross income or wages if the payments are: (1) made to the Code Sec. 170(c) organizations for the relief of victims of COVID-19; and (2) paid to the Code Sec. 170(c) organizations before Jan. 1, 2021.

Similarly, the IRS will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages to the employees. Electing employees may not claim a charitable contribution deduction under Code Sec. 170(c) with respect to the value of forgone leave excluded from compensation and wages.

All of the information contained herein is intended to provide information on options and updates created by the CARES ACT and other changes effecting the payroll taxes and withholding. Each topic is covered in summary form only and it should not be considered tax or accounting advice.  Before taking action it’s important to review all information regarding the provision and to consult a tax professional.

 

Free 2019 Tax Update & Planning Seminar

We have been making a list and checking it twice, tryTax planning white boarding to separate the naughty tax changes for those that are nice. Join us for a tax update that will help you focus on the that changes that will allow you to reduce your tax bill this year. This free seminar will not only help you understand the many changes to the tax laws that have taken place it is all filled with tax planning tips designed to help you take the actions necessary to reduce your tax bill and keep more of your hard earned money in your pocket.

The seminar will take place at 2319 N Andrews, Fort Lauderdale FL 33311, beginning promptly at 6:00 PM and last for 2 hours. There will be plenty of time for questions and a handout to make sure you have a list of actions you can take before year end.

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Be Tax Smart

In another case of failure to ask the consequences before taking action, we recently had to tell a client that gifting a rental property to their parents locked up the suspended passive activity losses they had on the property until the property is disposed of by their parents.

What this means is that a passive loss carry forward of over $100,000 (which would have become currently deductible had the property been sold, reducing their current tax bill $22,000) would not apply, at least until the property was sold by their parents.
Had they asked, they might have decided to sell the property and buy something more fitting to gift to their parents, or just sell the rental and then purchase a second home for their parents to live in.

Being tax smart means asking the right questions before you take action, not after.