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James Damon is an associate in Covington’s Washington, DC office, where he practices with the firm’s Employee Benefits and Executive Compensation Practice Group.

Nearly 18 months into the pandemic, the IRS continues to issue guidance on the employee retention credit, a credit that was adopted in March 2020 and has been addressed in a number of articles on the Tax Withholding & Reporting Blog, most recently on August 3, 2021.

The latest guidance takes the form of Notice 2021-49 and Revenue Procedure 2021-33, which together address a range of topics, including how employers should treat cash tips for purposes of determining the amount of qualified wages, whether the credit may be claimed with respect to the same wages for which the employer receives the Code Section 45B credit, how the related individual rules work for determining qualified wages, and whether employers are required to file amended tax returns if they claim the employee retention credit retroactively.  The Service has also outlined a safe harbor that employers may apply to exclude from gross receipts the amount of the forgiveness of any PPP loans or the amount of shuttered venue operator grants or restaurant revitalization grants.
Continue Reading IRS Issues Additional Guidance on Employee Retention Credit

In February, a U.S. Tax Court opinion in Anikeev v. Commisioner  addressed challenging issues regarding the IRS’s existing policy with respect to the taxation of credit card rewards and other rebates.  The case involves Mr. and Mrs. Anikeev, each of whom held a Blue Cash American Express Card (“Blue Card”) during 2013 and 2014, on which they accumulated a substantial amount of reward dollars through the use of their cards.  At issue in Anikeev is whether the reward dollars were taxable income to the Anikeevs.  Basing its decision on longstanding IRS policy, the court determined that the overwhelming majority of the rewards were not taxable to the Anikeevs, although the decision does address how the Service could potentially reform its policy regarding credit card rewards to prevent the same result in the future.
Continue Reading Making a Point: Tax Court’s Anikeev Decision Challenges Longstanding IRS Policy on Credit Card Rewards

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

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

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 Senate Republican Proposal Would Enhance Employee Retention Credit

The IRS has shortened the time in which employers must deposit payroll taxes related to certain stock-settled awards issued to employees, in order to be eligible for an administrative waiver of late-deposit penalties.  Through a non-publicized change to its Internal Revenue Manual, the IRS has shortened the applicable deadline for depositing owed and accumulated employment taxes related to stock-settled awards from three business days after exercise (T+3) to two business days after exercise (T+2), while also expanding the administrative waiver’s applicability to additional types of awards.  This change occurred a mere eight days after General Legal Advice Memorandum, GLAM 2020-004, which we discussed earlier this month, was issued to IRS Examination explaining the timing of income rules and the deposit requirements applicable to certain stock-settled awards, as well as the history of the long-standing administrative waiver dating from 2003.
Continue Reading IRS Revises Administrative Waiver for Late Deposit Penalties Arising from Employment Taxes on Stock Options, SARs, and RSUs

On May 22, 2020, the IRS released a Generic Legal Advice Memorandum, GLAM 2020-004, which addresses the timing of the taxation and withholding of payroll taxes on certain stock-settled awards issued to employees.  Specifically, the GLAM focuses on the treatment of stock options, stock-settled stock appreciation rights (SARs), and stock-settled restricted stock units (RSUs).

Employers should be aware that the GLAM does not appear to alter the Service’s existing position with respect to such awards—the fair market value of the stock underlying the award is includible in gross income when the stock is deemed transferred to the employee.  However, the GLAM does appear to offer some additional insight into the timing of income inclusion with respect to RSUs.  Perhaps most importantly, the GLAM reiterates the IRS’s 2003 administrative position regarding the application of late deposit penalties to payroll tax deposits due on the exercise of nonqualified stock options.  A question had arisen regarding whether SEC guidance shortening the standard settlement cycle for securities transactions to two business days had the effect of shortening the period for depositing payroll taxes.  Deposits owed with respect to option exercises will continue to be deemed timely if deposited within one day of settlement, so long as settlement occurs within three days of the exercise date.
Continue Reading Much Ado About Nothing Much New: IRS Releases GLAM Addressing Payroll Taxation of Equity Compensation

On May 7, the IRS updated its frequently asked questions to reverse its earlier determination that health plan expenses paid or incurred by an employer to provide health benefits to furloughed employees who were not paid other wages were not qualified health plan expenses for which an employer could claim the employee retention credit.  The

On Wednesday, the IRS released extensive new guidance in the form of frequently asked questions (“FAQs”) on the IRS website addressing various aspects of the employee retention credit.  This is the third in a series of articles addressing various aspects of these FAQs.  This article addresses the determination of qualified wages and allocable qualified health plan expenses.  Our first article discussed the IRS’s interpretation of the aggregation rules under section 2301(d) of the CARES Act and the determination of employer eligibility based on a full or partial suspension of operations due to a government order.  Our second article focused on employer eligibility for the credit based on a significant decline in gross receipts.  Subsequent articles will address issues related to the income and deduction treatment of qualified wages for employees and employers and issues related to the use of third-party payers.  Before the release of the IRS FAQs, we addressed how employers can claim the employee retention credit and its interaction with the deferral of employer social security tax deposits (see earlier article).

Although employers should carefully consider the FAQs, they should be mindful that these FAQs are not binding guidance but instead represent the current thinking of the IRS on the employee retention credit.


Continue Reading IRS Employee Retention Credit FAQs Provide Guidance on Calculation of Qualified Wages and Qualified Health Plan Expenses

Yesterday, the IRS released final regulations that aim to prevent identity theft by permitting, but not requiring, employers to truncate the taxpayer identification numbers (TINs) on copies of Forms W-2 and Forms W-2c furnished to employees.  The regulations finalize proposed rules issued in 2017.  Generally, this rule applies to Forms W-2 required to be filed or furnished after December 31, 2020, so employers still have time to decide whether to implement the change.  The delayed effective date is intended to allow states and local governments time to update their rules to permit the use of truncated TINs, if they do not already do so.

The TIN for most individuals (and all employees whose income is required to be reported on Form W-2) is his or her social security number (SSN); therefore, instead of including an individual’s full nine-digit SSN, the final rule permits employers to truncate this sensitive personal identifying information.  In place of the full SSN, employers may use a truncated TIN, which is in the format of XXX-XX-#### or ***-**-#### with the #’s replaced by the final four digits of the employee’s social security number.  Full TINs are still required on copies of Form W-2 filed with the Social Security Administration, however.  In addition, payers of third-party sick pay must include full TINs on statements to employers of employees to whom the third-party paid sick pay.  However, truncated TINs may be used on Forms W-2 that report third-party sick pay issued by employers to employees.


Continue Reading New Rule Permits Employers to Include Truncated TINs on Forms W-2 and Forms W-2c