As another year draws to a close and employers begin preparing for year-end and for the new year ahead, we have compiled this summary of some important payroll tax items to keep in mind. Although this year did not see the same breadth of changes that the Tax Cuts and Jobs Act (TCJA) brought in 2018, many employers are still working to integrate the law’s impacts to benefits such as relocation expenses. Looking ahead to 2020, employers will be facing another TCJA-related change: the updated Form W-4.
This alert provides employers with an overview of those items, as well as important due dates, general payroll tax year-end recommendations, and best practices to keep in mind when preparing W-2s and planning for the new tax year.
2019 Information Return Due Dates and Filing Requirements
|
Form & Title |
Which Government Agency to file With |
File by |
Furnish to Recipient by |
E-filing Mandate |
|
W-2, Wage and Tax Statement |
Social Security Administration |
January 31, 2020, whether filing paper or electronic returns |
January 31, 2020 |
E-file required if filing 250 or more Forms W-2 |
|
1099-MISC, Miscellaneous Income[1] |
IRS |
February 28, 2020,[2] |
January 31, 2020 |
E-file required if filing 250 or more Forms 1099-MISC |
|
3921, Exercise of an Incentive Stock Option Under Section 422(b) |
IRS |
February 28, 2020,[3] |
January 31, 2020 |
E-file required if filing 250 or more Forms 3921 or 3922 |
2019 Year-End Best Practices and Considerations
Fringe Benefits
Fringe benefits are defined as a form of pay for performance of services given by an employer to its employees as a benefit. The value of fringe benefits must be included in an employee’s wages unless specifically excluded by law. In general, taxable fringe benefits are subject to withholding when they are made available.
However, employers may elect to treat taxable non-cash fringe benefits as paid in a pay period, or on a quarterly, semiannual, or annual basis, but no less frequently than annually. Employers are not required to choose the same period for all employees and can withhold more frequently for some employees than for others. Employers can also treat the value of a single fringe benefit as paid on one or more dates in the same calendar year, even if the employee receives the entire benefit at one time. For example, if an employee receives a fringe benefit valued at $1,000 in one pay period during 2019, the employer can treat it as being made in four payments of $250, each in a different pay period of 2019.
Under a special rule, benefits provided in November and December, or a shorter period in the last two months of the calendar year, may be treated as paid in the following year. Only the value of benefits actually provided during the last two months may be treated as paid in the subsequent year. Employers do not have to notify the IRS that they are using this special accounting rule.
An employer may use this rule for some fringe benefits but not others. The special accounting period need not be the same for each fringe benefit. However, if an employer uses the special accounting period rule for a particular benefit, the rule must be used for that benefit for all employees who receive it.
Earnings and Deduction Code Review
The overall accuracy of an employer’s employment tax filings and an employee’s Form W-2 depend on proper tax treatment of the underlying compensation and benefits items. For most employers, all compensation and benefits items offered throughout the year are broken out in a series of earnings codes and deduction codes within the payroll system, whereby each code is assigned specific attributes that direct the tax treatment of the code (e.g., whether a specific earning is taxable or nontaxable, or whether a specific deduction is pre-tax or after-tax). It is critical, especially given the recent TCJA changes, that employers review their earnings and deductions codes for proper configuration and proper mapping to Form W-2 boxes. Performing an annual earnings and deduction code review in advance of year-end may allow an employer to make any necessary adjustments prior to issuing Forms W-2 and will help promote a clean start for the new year.
Employment Tax Return and W-2 Reconciliation
Whether payroll is processed in-house or by a third-party provider, reconciliation is vital to ensure accurate reporting and year-end balancing. As a best-practice, employers should perform a reconciliation of Forms W-2 to federal and state employment tax returns at year-end, before such returns are filed, to identify and investigate out-of-balance issues. IRS and SSA compare Forms 941 and W-2 wage and tax totals, and IRS can assess additional tax and penalties for unresolved out-of-balances. If possible, employers should reconcile employment tax return year-to-date totals against pro-forma Form W-2 totals on a quarterly basis to identify and remediate issues well in advance of year-end when things may be less hectic.
Social Security Administration W-2 Name and SSN Matching
Insights
Many errors in qualified retirement plans involve the plan using compensation that does not agree with the definition of compensation in the written plan document. These errors are often traceable back to incorrect compensation codes in the payroll system and errors in the system’s instructions to accumulate the compensation eligible for plan contributions. Errors in compensation used for plan contributions may require a written application to the IRS’ voluntary compliance program, the payment of a user fee to the IRS and a corrective contribution to the retirement plan to make up the error and earnings to each affected plan participant.
SSA began mailing “Employer Correction Request Notices” in March 2019 to employers and third-party submitters with at least one 2018 Form W-2 where the name and Social Security number (SSN) did not match the SSA’s records. The purpose of the notice is to advise employers that corrections are needed for SSA to properly post its employee’s earnings to the correct record.
The issue is that employees often simplify their name or use a nickname when completing employment forms. In other cases, employees may need to change or correct their name on their Social Security card — for example, if they legally changed their name due to marriage, divorce, court order, or any other reason (even typographical errors). Although employees must tell SSA about their name change and get a corrected Social Security card, sometimes they don’t act promptly, creating a disconnect with the employer’s Form W-2.
Employers should communicate to employees to use their names exactly as they appear on their Social Security cards when completing Form W-4 and other paperwork. As part of year-end preparation employers should review employee records to ensure all employee names, SSNs and other demographic information is valid and up-to-date for Form W-2 and other year-end reporting.
FUTA Credit Reduction
Employers with employees in the Virgin Islands should be aware that for 2019, the amount of FUTA paid will be higher because such jurisdiction has not repaid its’ federal unemployment insurance loan balance in full by the November 10, 2019, repayment deadline.
Third-Party Sick Pay
Sick pay is any amount paid to an employee for any period during which the employee is temporarily absent from work due to injury, sickness, or disability, except disability retirement payments or payments for medical and hospitalization expenses. Third-party sick pay is sick pay that is paid to an employee by some person (i.e., a third party) other than the employer for whom services are normally performed. Reporting requirements for third-party sick pay are contingent upon whether the third-party is treated as the employer for purposes of withholding and reporting employer and employee taxes such as FICA, FUTA, and income tax withholding. Employers should review their policies and contractual agreements with third-party sick pay providers to confirm the employer’s FICA match and other wage and tax reporting and remittance responsibilities (and the withholding and reporting responsibilities of the third party) in connection with taxable disability payments under its various policies.
Mergers and Acquisitions
Mergers and acquisitions and other reorganizations generally fall into one of three types for purposes of reporting employment taxes: (i) statutory mergers and consolidations; (ii) acquisitions qualifying under predecessor-successor rules; and (iii) acquisitions that are neither (i) nor (ii). Where such acquisition, statutory merger, or consolidation creates a discrepancy between Form W-2 and Form 941 in social security wages and tips, Medicare wages and tips, and federal income tax withheld, employers should file Form 941 Schedule D, Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations. If the employer’s business is continuing to operate, the employer should file Form 941 Schedule D with their Form 941 no later than the due date of their Form 941 for the first quarter of the year after the calendar year of the transaction (i.e., April 30). Alternatively, if the employer’s business is not continuing to operate, such employer should file Form 941 Schedule D with their final Form 941.
Looking Ahead 2020
Revised Form W-4 Employee’s Withholding Certificate
Beginning in 2020, employees will have access to a redesigned Form W-4 to report information needed for their employer to correctly withhold federal income tax. The redesigned Form W-4 no longer uses the concept of withholding allowances to compute federal withholding. Instead, the Form W-4 will contain a series of simplified steps for employees to report job, income and deduction amounts directly to compute withholding accurately.
Employees who have submitted Form W-4 in any year before 2020 are not required to submit a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently submitted Form W-4. However, beginning in 2020, all new employees must use the redesigned form, and any employees hired prior to 2020 who wish to adjust their withholding must use the redesigned form. A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it's filed with the employer. To continue to be exempt from withholding in the next year, an employee must give the employer a new Form W-4 claiming exempt status by February 15 of that year. In 2020 employees must use the redesigned form for this purpose.
Insights
The final, redesigned Form W-4 for 2020 was released on December 5, 2019. In anticipation of releasing the final version of the redesigned Form W-4, IRS published FAQs on the draft 2020 Form W-4. IRS is also encouraging everyone to perform a “paycheck checkup” to determine whether adjustments to withholding elections may be beneficial. IRS has created a Tax Withholding Estimator to conduct the “paycheck checkup.” To prepare for the redesigned 2020 Form W-4, employers may consider providing employees with an informational alert to communicate the Form W-4 changes and the importance of conducting a “paycheck checkup,” without offering specific tax or legal advice.
New Limits and New Wage-bases
Employers should begin to input or confirm payroll system utilization of 2020 Social Security, state unemployment, state disability and other similar taxable wage-limits and tax rate information. The Social Security Administration announced that the 2020 wage-base will be $137,700, which is an increase of $4,800 from $132,900 in 2019. Many states have also begun releasing updates to their unemployment and disability wage-bases. Employers using third-party providers should test the third-party’s system requirements before the first live payroll in 2020.
SUI Rate Review
The 2020 state unemployment insurance (SUI) tax rate season has already begun in some states. Employers should be on the lookout for 2020 contribution rate notices in the states with which they are registered as an employer for SUI purposes. It is important that employers review contribution rates as soon as possible after receiving them because there is a limited amount of time to protest the rate calculation if the employer deems it to be incorrect. Additionally, employers should be aware of two potential SUI tax savings opportunities: voluntary contributions and joint accounts.
Tax Reform Reminders for Payroll Tax[4]
Relocation Expenses
Under the TCJA, employer reimbursements for relocation expenses made to an employee or paid directly to third parties on or after January 1, 2018, are includible in the employee’s wages and subject to FITW, FICA, and FUTA, with the exception of relocation expenses related to Armed Forces members on active duty.
Employers should be aware that not all states have changed their laws to fully conform to the TCJA. In states that have not fully conformed to the TCJA, employer payments for job-related relocation expenses may continue to be excludible from the employee’s state taxable wages.
Transportation Fringe Benefits
TCJA disallowed an employer’s deduction (and created unrelated taxable business income for tax exempt employers) for the cost of providing any transportation fringe benefits under Section 132(f) (i.e., qualified van pools, qualified parking at or near the workplace, and transit benefits), except as necessary to ensure the employee’s safety.
Employers should note that there is no change to the federal income or employment tax treatment of van pool, employee parking, and transit benefits. In other words, employers may continue to offer transportation fringe benefits and may continue to exclude the allowable amount of qualified transportation fringe benefits from employee wages.
[1] Effective August 3, 2018, extensions of time to file Form 1099-MISC reporting non-employee compensation to the IRS are no longer automatic. Employers may request one 30-day extension to file Form 1099-MISC by completing Form 8809, Application for Extension of Time to File Information Returns, including a detailed explanation of why the employer needs additional time.
[2] Note that even though 2020 is a “leap year,” the instructions to Form 1099 state that the filing deadline is Friday, February 28, 2020 (not Saturday, February 29, 2020). Filing deadlines that fall on a Saturday, Sunday or holiday are generally extended to the next business day.
[3] See Footnote 2 above.
[4] All changes are effective beginning on January 1, 2018, through December 31, 2025, unless otherwise indicated.
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