Payroll Tax Deferral Memorandum – What Do We Do Now?

Payroll Tax Deferral Memorandum – What Do We Do Now?

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Covid-19 relief for individuals and organizations

On August 8, 2020, President Trump issued an executive order and three memoranda providing or extending COVID-19 relief to individuals and organizations.

The executive order directs various Cabinet and executive agency heads to find means of limiting evictions and foreclosures. The three memoranda provide for the deferral of:

  • Collection of payroll taxes
  • Supplemental unemployment payments
  • An extension of student loan payment deferments
  • Reduction of interest rates for student loans

At this time, many questions exist surrounding these directives, and additional guidance is needed before implementation.

Payroll Tax Deferral

The payroll tax memorandum directs the Secretary of the Treasury to defer withholding, deposit, and payment of the employee portion of social security tax on wages or compensation paid from September 1 through December 31, 2020. The deferral includes only the 6.2 percent social security portion of taxes under the Federal Insurance Contribution Act for employees with bi-weekly pre-tax income less than about $4,000.

Amounts deferred will be without penalties, interest, increased amounts, or additions to tax. The payroll tax memorandum directs the Secretary of the Treasury to issue guidance to implement the memo and find ways to eliminate the deferred tax.

Note: The payroll tax memorandum provides only for the deferral of the employee portion of the social security tax. If the Secretary of Treasury does not eliminate the deferred tax, an affected employee will be required to pay any remaining deferred tax. Until further guidance is issued, it is uncertain how an employee will pay the deferred tax following the end of the deferral period.

The memorandum raises several questions for employers, including:

  • Is it voluntary?
  • How do you determine which employees are eligible?
  • When will the tax be due?
  • How do you collect the deferred tax from employees?
  • When will the tax be due in the future?
  • Will the software providers be ready?
  • When will additional guidance be available?

We expect the Department of Treasury and IRS to issue additional guidance soon. We recommend employers continue to withhold and remit the employee portion of social security tax as usual. 

Unemployment Insurance Benefits/Disaster Relief

In March, the CARES Act created the Federal Pandemic Unemployment Compensation Program, which provided an additional $600 per week to individuals collecting regular unemployment compensation benefits. This benefit expired on July 31, 2020.

The disaster relief memorandum directs the Federal Emergency Management Agency to provide benefits from the Department of Homeland Security’s Disaster Relief Fund. It advises states to use their Coronavirus Relief Fund allocation to provide financial relief to unemployed Americans affected by COVID-19, principally through an up to $400 per week supplemental unemployment compensation benefit. Seventy-five percent of the cost of the benefit shall come from those federal funds. State governments will be responsible for the remaining 25 percent, subject to an agreement between the federal government and the state concerning the program and funding.

The disaster relief memorandum makes two significant changes in eligibility compared to the $600 supplemental benefit under the CARES Act.

  1. It limits eligibility to individuals who receive at least $100 per week in unemployment compensation assistance.
  2. It requires the individual to certify that their lost wages are attributable to disruptions caused by COVID-19.

Student Loan Payment Relief

The student loan memorandum advises the Secretary of Education to continue student loan payment relief during the COVID-19 pandemic for specific federal student loans held by the Department of Education. It also directs the Secretary of Education to continue the temporary waiver of all interest on student loans until December 31, 2020. This memorandum further provides that student loan borrowers may continue to make payments if they wish to do so.

Eviction Minimization

The housing executive order directs Cabinet members to consider steps to take action necessary to minimize residential evictions and foreclosures during the ongoing COVID-19 national emergency. The order advises cabinet secretaries to consider how to halt evictions and foreclosures temporarily and look at ways to provide temporary financial assistance to renters and homeowners struggling to make monthly payments, including providing Federal funds to landlords.

Based on the need for significant additional guidance at this time, we cannot recommend implementing the payroll tax deferral. We are monitoring developments closely. As more guidance is provided, Smith Schafer will keep you informed.

Payroll Tax Credits & PPP Loan Guidance

Payroll Tax Credits & PPP Loan Guidance

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Additional Reporting Recommendations

Amidst the current crisis, two major pieces of stimulus legislation were signed into law:

  1. The Families First Coronavirus Response Act (FFCRA)
  2. The Coronavirus Aid, Relief and Economic Security Act (CARES)   

Both acts provide opportunities for businesses, but also require additional tracking for proper reporting. Our recommendations for tracking related to payroll tax credits and for tracking related to the Paycheck Protection Program (PPP) Loan are below. 

Payroll Tax Credits Available

We recommend employers set up new pay codes for each credit listed below. The pay code should be set-up as regular taxable wages and subject to all tax types including:

  • Federal and state income tax withholding
  • Social security
  • Medicare
  • State and federal unemployment

Employee Retention Credit (CARES)

Refundable tax credit equal to 50 percent of qualified wages paid to employees after March 12, 2020 and before January 1, 2021, up to $10,000 of qualified wages per employee. This credit is not available if the entity took out a PPP Loan.   

Emergency Paid Sick Leave (FFCRA)

Refundable tax credit equal to regular pay of up to $511 per day and up to 10 days for employees who are affected by COVID-19. The maximum credit is $5,110 per employee.

Expanded Paid Family Medical Leave (FFCRA)

Refundable tax credit equal to 2/3 of regular pay up to $200 per day and up to 10 weeks for employees who are caretakers for those affected by COVID-19. The maximum credit is $10,000 per employee. 

Additional details on each credit can be found on our COVID-19 Resource center page. Employers utilizing the PPP Loan cannot use the same wages for the credits under the FFCRA. In addition, employers claiming the employee retention credit cannot use the same wages for the sick leave and family medical leave credits. 

Claiming Credits & Applying for Refunds

Employers have three options for utilizing the eligible credits and/or claiming refunds:

  1. Claim the entire credit when filing the subsequent Form 941 (Employer’s Quarterly Federal Tax Return). Second quarter 2020 is due July 31, 2020.
  2. Short payroll tax deposits by the expected credit.
  3. File Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
    • Use the form when the expected credit exceeds payroll tax liability
    • Can be filed more than one time each quarter
    • Each form is cumulative for the quarter
    • Form(s) to be reconciled on your quarterly Form 941
    • Keep a copy of all Form 7200s filed

For employers that have eligible credits, we recommend shorting your payroll tax deposits first, followed by using Form 7200 to the extent that additional refundable credit is available. This will provide the most timely return of expenditures. The IRS is currently updating forms and systems to accommodate the new credits. No changes are expected for the Form 941 for first quarter 2020, this return is due on or before April 30, 2020. The second quarter form 941 is expected to have additional line(s) or worksheet(s) to reflect the advanced payments reported on Form 7200 and/or credit calculations. 

Employment Tax Return Filed by a Third Party

Third parties preparing employment tax returns on behalf of others are not entitled to keep the credits. The employer is entitled to the credits for wages paid to employees.

Third party filers such as ADP, Paychex, Paylocity, SmartHR and others are all working on solutions to reduce the tax liability amount remitted related to eligible credits. We recommend keeping in close contact with the third-party payroll provider. Please watch their communications carefully.

Paycheck Protection Program Loan Recommendations

PPP Loans have very strict rules as to what the funds can be spent on, to help you stay in compliance with the rules we recommend the following:

  • Separate Bank Account: We recommend clients set up a separate (new) bank account for the PPP funds, so they can easily be traced to use for appropriate purposes. Ideally, you would pay the qualifying items out of this account. However, if this is not possible, we recommend continuing to pay those expenses from other accounts and keep a detailed record of what is reimbursed to other accounts for a clear tracing of these funds.
  • What Can the Funds be Used for: Generally, the funds can be used in the eight weeks following the loan, for payroll costs, rent, utilities and interest (not principal) on loans. More specifically, these costs include:
    • Payroll: wages, tips, and other similar compensation, employer portion of SUTA, employer portion of health insurance, dental insurance, and health savings account contributions. Payroll does not include employer portion of FICA, which is Social Security and Medicare.
    • Rent: rent payments on leases dated before February 15, 2020.
    • Mortgage Interest: payments of interest on mortgage obligations incurred before February 15, 2020.
    • Utility Payments: payments of utilities based on contracts that were in effect before February 15, 2020.

Additional Guidance is Needed Related to the Following Items

Because the CARES Act specified the funds could be used for expenses paid and incurred within the eight weeks following the loan date, there are a number of things to be clarified, including:

  • Payroll costs paid in the eight-week period, but related to the pay period before the loan proceeds were received.
  • Rent payments for the month of the loan and the final month included in the 8-week period.
    • Example: If the loan disbursement occurs on April 10th, does the rent for the month of April count or does the rent for the month of June count?
  • Mortgage Interest: is this the amount based on the due date of the payments or based on the date the interest was incurred?
  • Utility Payments: which utilities will count for this? Will cell phones and internet count?

The Interim Final Rule question (r.) asks on what the proceeds can be spent. In the answer portion of the question “interest payments on any other debt obligations that were incurred before February 15, 2020” is included as a permissible use of the funds. However, in the section on loan forgiveness of the interim final rule only mortgage interest is included as to the portion that is forgiven.

Additional Resources

New information is being released daily, and in some instances, is in direct contrast to prior guidance. The following are resources to keep you up-to-date. 

U.S Department of Labor COVID-19 Resource
This page includes Fact Sheets and FAQ’s for the FFCRA credits. The FAQs have examples and documentation requirements for both employer and employee when an employee takes paid sick leave or expanded family medical leave. 

IRS.gov Coronavirus Tax Relief
Find the latest news releases, FAQs issued by the IRS and much more.

Minnesota Department of Revenue – our Response to COVID-19
See the latest news releases, FAQs issued by the MN Department of Revenue and information on filing and payment deadlines.

US Department of the Treasury – Assistance for Small Businesses
More information on the paycheck protection program including applications, FAQs and more.

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Federal and Minnesota Tax Deadlines Extended

Federal and Minnesota Tax Deadlines Extended

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Treasury Secretary Mnuchin announced on Friday, March 20th that the federal tax deadline will be extended until July 15, 2020 and Minnesota Governor Walz announced that the State of Minnesota will follow suit with income tax filings and income tax payments due July 15.

Your tax and accounting professionals at Smith Schafer are working hard to provide you with timely service on your tax returns and will continue to work to help you get your taxes filed as soon as possible. However, in light of state and national recommendations on social distancing, you may see a delay in the timing of your tax return now that the deadline has been extended.

Please continue to mail, drop off, or upload your tax information to us.  If you would like a link to securely upload your documents, please let us know.

We are here to serve you, our valued clients, and recognize that now is an unprecedented time for you as individuals and as business owners.

At present, many states have not acted to change their filing deadlines and we will continue to monitor the state deadlines and keep you in compliance with the various states.

To our Business Clients

We recognize that your businesses are facing decisions that you have never had to face, and we are here to help. We are monitoring all bills that pass for their impact on our clients and will help you navigate through the impacts for your business.  

Tax Implications Related to COVID-19

Tax Implications Related to COVID-19

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There are several federal and state tax law changes related to the coronavirus/COVID-19 and there are new developments seemingly every day. Three recent coronavirus tax changes, that may affect your situation, are explained below.

Interest and Penalty Relief for Federal Taxes Due April 15, 2020

Treasury has granted interest and penalty relief for federal tax payments due April 15,2020. This includes the balance due on the 2019 federal income tax return as well as the first quarter estimated tax payment for 2020.

Individuals can postpone payment up to $1,000,000 regardless of filing status, corporate taxpayers can postpone up to $10,000,000. Balances over these threshold amounts will be due by April 15, 2020.

At this time, this is not an extension of the tax deadline. It is only a postponement of the payment date. As such, your federal income tax return will need to be filed or extended by April 15th. In either case, you are allowed to use the postponed payment date.

If you choose to file your tax return by April 15, 2020, please return Form 8879 to our office and we will electronically submit the tax return. Then, you may wait until July 15th to pay the balance due. You may also defer your first quarter estimated tax payment until July 15th. Please note, your second quarter estimated tax payment will be due June 15, 2020. This date is unchanged.

If you choose to extend your tax return you must do so by April 15, 2020. Your extension payment will not be due until July 15, 2020 regardless of when you file your return. Similarly, your first quarter estimated tax payment will not be due until July 15, 2020. The tax return extension allows a six-month extension of time to file, but the interest and penalty forgiveness is only for a three-month period.

CPA groups continue to advocate for a delay in the tax filing deadline and we will send a communication to our blog subscribers if this date changes.

At this time, Minnesota has not enacted similar changes, but we expect to see changes from the state, as well.

Minnesota Sales Tax Deferment for Certain Industries   

Minnesota Department of Revenue has granted a one-month deferment of sales tax for businesses affected by the state shutdown of bars, restaurants, and other places of public accommodation. This applies only to the sales and use tax payment due March 20, 2020. Payment will still be required on April 20, 2020.

Families First Coronavirus Relief Act

There are several coronavirus tax changes from the Families First Coronavirus Relief Act (FFCRA), including a 100 percent tax credit for amounts paid out to employees under the FFCRA. Please note this provision applies only to employers with 500 employees or less and there are certain other exemptions for employers with under 50 employees. This legislation was enacted late in the day on March 18, 2020 and takes effect 15 days after enactment. The bill provides the following benefits to employees:  

  • Employees who are on sick leave because they are sick can receive their full pay, up to $511 per day, or $5110 total.
  • Leave taken to care for children whose schools or daycares have closed is paid at two-thirds the employee’s regular rate of pay, with a maximum of $200 per day or $10,000 total.
  • Employers cannot force employees to use up vacation or other sick time before receiving this benefit.
  • Self-employed individuals can also receive a benefit up to the limits described above.
  • There is a 10-day waiting period before this benefit applies. Employees may use existing sick or vacation time to cover these days.  

Employers receive a tax credit on their quarterly payroll tax return for wages paid under the FFCRA in that quarter. This credit is refundable if the total wages related to the FFCRA exceed the total payroll tax liability. Due to the fact the bill takes effect 15 days after enactment and there is a 10-day waiting period. This will likely mean employers will receive the credit on their second quarter payroll tax returns, due July 31, 2020.

5 Tips For Avoiding Tax-Related Identity Theft

5 Tips For Avoiding Tax-Related Identity Theft

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Tax-related Identity Theft: When someone steals your Social Security number and uses it to file a tax return and claim a fraudulent refund.

According to the IRS, in 2017, 597,000 tax returns were confirmed identity theft. All taxpayers should ensure they are doing everything they can to prevent a thief from stealing their identity.

5 Simple Tips to Help Protect Yourself

  1. Learn to recognize and avoid phishing emails, calls and texts from scammers. These thieves pose as legitimate organizations such as banks, credit card companies and the IRS.
  2. Do not click on links or attachments in unsolicited emails or messages from unknown senders.
  3. Use a security software with firewall and anti-virus protections.
  4. Use strong, unique passwords.
  5. Protect personal information. Ensure your tax records are secure.

Every year, the IRS releases the Dirty Dozen – a list of the largest tax scams they saw for that year’s taxes. The IRS scams list reads like a playbook from the past, with phishing, identity theft, and fake charities making the list. 

IRS Introduced New Tax Withholding Estimator

IRS Introduced New Tax Withholding Estimator

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Calculate Your Tax Withholding

The IRS has improved its online tax withholding calculator. It includes changes from the updated W4.

The new version of the calculator helps workers effectively adjust their withholding and features a customized refund slider allowing users to choose the refund amount they prefer from a range of different amounts.

We recommend checking your withholding every quarter to protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time.

Note: The tax withholding calculator does not ask you to provide sensitive personally-identifiable information (i.e. Social Security number, address, bank account numbers). The IRS does not save or record the information you enter on the Calculator