IRS Releases Additional FAQs on Deferral of Employment Tax Deposits Under Section 2302 of the CARES Act

On July 30, 2020, the IRS released guidance in the form of new frequently asked questions (“FAQs”)  addressing the deferral of the employer portion of Social Security taxes under section 2302 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  These FAQs are broad in nature, providing guidance on various considerations relevant to section 2302 of the CARES Act, including application of these rules to first calendar quarter deposits, coordination with the next-day deposit rule, and considerations for employers that use third parties to report and deposit employment taxes with the Treasury.  Covington continues to review this guidance, and has summarized in this blog post some of the provisions we consider most relevant to employers.

When reviewing this latest guidance from the IRS, employers should be mindful that although they represent the current thinking of the IRS regarding section 2302, these FAQs are  non-binding; the IRS is under no obligation to comply with these FAQs and could therefore take a different approach at any time.  As we have noted previously, the IRS has changed course with respect to FAQs issued in connection with other provisions in the CARES Act, such as the employee retention credit. Continue Reading

Mnuchin Confirms Trump Payroll Tax Deferral is not Mandatory

Secretary Mnuchin acknowledged in an interview today that the employee Social Security tax deferral envisioned in President Trump’s Presidential Memorandum will not be mandatory.  The memorandum instructs the Treasury Department to issue guidance under Section 7508A permitting employers to suspend the withholding, depositing, and payment of the employee’s share of social security taxes (and the equivalent Tier 1 Railroad Retirement Tax Act taxes) for certain employees.  The suspension would apply to wages paid from September 1 through December 31, 2020.

As we reported in our earlier coverage of the August 8 memorandum, Section 7508A provides authority to the Secretary to disregard periods of up to one year in determining whether taxes were timely paid.  The statute does not, however, provide any mechanism to require taxpayers to delay the payment of taxes.  Accordingly, employers may choose to withhold and deposit the employee share of Social Security taxes without regard to the deferral.  Employers that elect to defer the withholding of the tax will remain liable under section 3102(b) for the payment of the employee’s share of Social Security taxes even if the employer does not withhold the tax and cannot later recoup the tax from the employee.  Indeed, if the employer ultimately pays the employee’s share of the taxes and does not recoup the amount from the employee, the payment would generally be an additional wage for which additional payroll taxes would be due.

President Trump has indicated that he intends for the employee’s share of Social Security taxes that may be deferred to be forgiven.  However, Sec. Mnuchin also confirmed in the interview that any forgiveness of the underlying tax liability will require Congressional action, a tenuous prospect given the fraught political environment in Washington.

Trump Executive Action to Defer Employee Share of Social Security Taxes Raises Significant Legal Questions for Employers

On Saturday, August 8, President Trump signed a Presidential Memorandum directing the Secretary of the Treasury to “use his authority pursuant to [Code section] 7508A to defer the withholding, deposit, and payment of the tax imposed by [Code section] 3101(a) . . . on wages . . . paid during the period of September 1, 2020, through December 31, 2020,” subject to certain conditions.  (The memo as originally posted on the White House website would have applied retroactively to wages paid August 1, 2020, but was subsequently updated.)  Two conditions are enumerated in the memorandum.  First, the deferral applies only with respect to any employee the amount of whose wages payable “during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.”  Second, the amounts deferred shall be deferred without any penalties, interest, additional amount, or addition to the tax. Continue Reading

Senate Bill Would Ignore COVID-19 Assistance in Determining Worker Classification; Treat Certain Benefits as Qualified Disaster Relief Payments

Is an individual service provider an employee or an independent contractor?  As our employee benefits colleagues have noted previously in Covington’s Inside Compensation blog, the IRS test is complicated and just one of many for determining worker status under federal and state laws.  The American Workers, Families, and Employers Assistance Act (the “Bill”), one of a series of COVID-19 relief bills released by Senate Republicans, would address one aspect of worker classification during the COVID-19 pandemic.  Specifically, Section 214 of the Bill would provide that certain COVID-19 related benefits provided to an individual would not be taken into account in determining worker classification under the Code.  Section 214 further provides that such benefits (other than cash payments) would generally be considered qualified disaster relief payments under Code Section 139. Continue Reading

Senate Republican Proposal Includes Payroll Tax Credit to Defray Employer Expenses for COVID-19 Prevention

On July 27, Senate Republicans released a series of COVID-19 relief bills, including the “American Workers, Families, and Employers Assistance Act” (the “Bill”).  The Bill is a successor to several provisions in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, passed in March of this year, which attempted to blunt the early effects of the COVID-19 pandemic.

Section 213 of the Bill would create a new “safe and healthy workplace tax credit,” which would provide a refundable payroll tax credit equal to 50% of an employer’s “qualified employee protection expenses,” such as COVID-19 tests, protective personal equipment, and cleaning supplies.  The new tax credit would also cover “qualified workplace reconfiguration expenses,” including workspace modifications to protect employees and customers from the spread of COVID-19, and “qualified workplace technology expenses,” including technologies designed to reduce contact between employees and customers that were acquired by the employer on or after March 13, 2020, and were not acquired pursuant to a plan in existence before that date.

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Senate Republican Proposal Would Enhance Employee Retention Credit

As we noted in an earlier post, on July 27, Senate Republicans introduced new legislation in response to the continued COVID-19 pandemic.  One of the introduced bills, titled the American Workers, Families, and Employers Assistance Act (the “Bill”), would enhance the existing employee retention credit. Continue Reading

Recapture of Excess COVID-19 Payroll Tax Credits Addressed in New Regs

On July 27, 2020, the IRS published Information Release 2020-169 announcing the issuance of new temporary and proposed regulations to implement procedures to assess, reconcile, and recapture any portion of the credits under the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) erroneously credited, paid, or refunded in excess of the actual amount allowed. Continue Reading

Senate Republican Proposal Would Expand WOTC to Spur Hiring

On July 27, Senate Republicans introduced a series of bills intended as their opening salvo in what appears likely to be contentious negotiations among Senate Republicans, the White House, and House and Senate Democrats over the next legislative response to the COVID-19 pandemic.  Along with another round of direct stimulus payments to individual taxpayers, extended unemployment benefits, and enhancements to the employee retention credit (earlier coverage) enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, one proposed bill, the American Workers, Families, and Employers Assistance Act (the “Bill”), would expand the Work Opportunity Tax Credit (“WOTC”)  in an effort to spur employers to hire and rehire workers.

Under Section 51 of the Internal Revenue Code, the WOTC is a tax credit for employers who hire individuals belonging to one or more targeted groups.  Section 212 of the Bill would add a new WOTC targeted group for “COVID-19 unemployment recipients.”  The group encompasses individuals who have received (or are approved to receive) unemployment benefits for the week of or the week immediately preceding the hiring date.  Individuals may qualify as COVID-19 unemployment recipients regardless of whether their job loss resulted from the pandemic or predated it, so long as they remain eligible for unemployment benefits immediately before being hired.  For the employer to receive the credit, an employee would have to begin work between the date of enactment and January 1, 2021, potentially spurring a round of hiring late in 2020.

The WOTC is usually equal to 40% of “first-year wages,” subject to caps that vary among the different targeted groups.  For the COVID-19 targeted group, the Bill would increase the amount of the credit to 50% and apply a cap of $10,000 on first year wages, resulting in a maximum credit of $5,000 per hired or rehired employee.  (Generally, employers are prohibited for claiming the credit with respect to rehired employees, but the Bill would eliminate the restriction on rehires with respect to COVID-19 unemployment recipients.  The Bill also directs the Treasury Department to issue regulations to prevent abuse, such as terminating and rehiring employees to obtain the credit.)  Wages used in calculating the employee retention credit may not be included in the determination of the WOTC credit.

It is uncertain whether the proposed WOTC expansion will make it into any final COVID-19 package, but we will continue to monitor developments.

Notice 2020-54 Requires Reporting of Qualified Sick Leave Wages and Qualified Family Leave Wages Under FFCRA

The Families First Coronavirus Response Act (“FFCRA”) mandates employers of fewer than 500 employees provide two types of paid leave and includes two employer social security tax credits equal to the amount of paid leave that the employer is required to provide to employees related to the COVID-19 pandemic.  (See earlier coverage.)   Yesterday, in Notice 2020-54, the IRS announced that employers will have to report wages paid for leave mandated under the FFCRA either on Forms W-2 or on a separate statement.  The rules are intended to enable employees who also have self-employment income to properly determine the amount of any Self-Employment Contributions Act (“SECA”) tax credits to which they are entitled under the FFCRA.

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DAC 6 Implementation Imminent in Finland and Germany Despite Delays in Other EU Countries and the UK Due to COVID-19

At the end of June, the European Union (“EU”) amended EU Council Directive 2011/16/EU and its cumulative amendments (referred to in the aggregate, as the Directive on Administrative Cooperation “DAC 6” or the “Directive”) to give EU Member States the option to defer imminent DAC 6 reporting deadlines by up to six months due to disruptions caused by COVID-19.  The amendment to the Directive also includes language potentially allowing for an additional three-month extension depending upon how the pandemic unfolds, but cautions that further delays are unlikely.  Many EU Member States promptly announced a full six-month deferral, including Belgium, Croatia, Cyprus, the Czech Republic, Hungary, Ireland, Luxembourg, the Netherlands, Sweden, and the UK.  To date, Finland and Germany have announced that DAC 6 reporting will commence without any delay on August 31, 2020.

If U.S. multinationals with affiliates in the UK or EU countries have not taken steps to identify reportable tax planning and other arrangements caught up in the DAC 6 dragnet, they should do so immediately because the reporting requirements are onerous.

For readers unfamiliar with DAC 6, an overview of this new reporting regime follows. Continue Reading

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