This year has been tough and many will be glad to ring in the New Year for 2021. There are substantial changes to year-end payroll and tax reporting employers need to know about in order to close the books on the year 2020. As we look back to January, we began the year with a new W-4 form and changes to overtime rules. March brought sweeping legislation in response to the COVID-19 pandemic including assistance to employers through the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES). As your business prepares for the year-end, steps now to ensure accuracy and compliance.
Review of new W-4 forms and ensure compliance with overtime rules
As you prepare for the year-end, be sure to go back and review that your payroll processing was updated to reflect new regulatory changes that went into effect this year.
The IRS officially released the final version of the 2020 Form W-4, retitled Employee’s Withholding Certificate earlier this year. The form was redesigned to reflect changes to the federal tax code that went into effect with the Tax Cuts and Jobs Act and make it easier for employees to calculate accurate income tax withholding. New employees hired as of January 1, 2020 were required to fill out the new form. However, existing employees were not required unless they desired a change in withholding amount. Therefore it will be important for employers to review all W-4s with employees to ensure personal information is accurate and up-to-date and the correct W-4 is on file for new hires.
Additionally, the Department of Labor’s (DOL) new overtime rules took effect on January 1, 2020. Employers should ensure that any workers newly eligible for overtime pay were paid the correct wages. The new salary threshold increased from $455/week or $23,660/year to $684/week or $35,568/year. This means that an employee earning less than $35,568 per year must be paid overtime wages if working more than 40 hours in a week. The annual compensation level was also raised for “highly compensated employees (HCEs)”.
COVID-19-related employment tax changes
Eligible employers should also remember to claim any refundable tax credits that they qualify for under this year’s COVID-19 legislation. Additionally, plans should be made now to repay any deferred payroll tax payments in 2021 and 2022 as appropriate. The IRS explains:
The FFCRA provides small and midsize businesses with refundable tax credits as dollar-for-dollar reimbursement for the cost of providing COVID-19-related paid sick and family leave wages to employees.
To encourage eligible employers to retain employees on their payroll despite COVID-19-related economic hardship, the CARES Act provides an employee retention credit equal to 50% of qualified wages paid to employees from 3/12/2020-12/31/2020. However, any business that received a Paycheck Protection Program (PPP) loan is not eligible for this credit.
The CARES Act also allowed employers to defer both deposit and payment of the employer share of social security taxes from 3/27/20-12/31/2020. If your business took advantage of this relief, be prepared to submit your deferred payments on time. Half of those payments are due by 12/31/2021 and the other half by 12/31/2022. Refer to IRS Notice 2020-22 for more information.
Additionally, some employees were also eligible for a payroll tax holiday between 9/1/2020 and 12/31/2020. Be sure to collect any deferred amounts between 1/1/2021 and 4/30/2021 to repay this obligation. Refer to IRS Notice 2020-65 and the IRS updated W-2 reporting instructions for more information.
Prepare for new FICA wage threshold in 2021
The Social Security Administration announced that the wage threshold subject to FICA taxes will increase from $137,700 to $142,800 beginning January 1, 2021. Calculated annually by the SSA, the wage cap is based on the national average wage index. FICA tax includes both Social Security and Medicare payroll taxes. Social Security is financed by a 12.4% payroll tax on wages up to the wage threshold, with half paid by employers and half by employees. Self-employed workers pay the entire 12.4 percent. Medicare is calculated at 2.9% of wages, with half paid by employers and half by employees.
7 tips for smooth year-end processing
It’s important for businesses to stay up-to-date with payroll compliance and reporting requirements, including new form issuance. For example, businesses must file a new form 1099-NEC in 2020 for nonemployee compensation which replaces the old 1099-MISC. To ensure smooth year-end payroll processing, follow these best practices:
1. File on time. Check federal and state deadlines to ensure your payroll tax forms are filed on time to avoid penalties. Ensure employee and contractor information is accurate and make sure your W-2s and 1099-NECs are on file by 1/31/2021.
2. Ensure overtime pay is calculated according to new 2020 rules. Federal overtime wages are calculated at 1.5 times an employee’s regular pay. States have different requirements to keep in mind as well.
3. Calculate your employee retention credit per CARES Act if applicable. Ensure accuracy of Form 941 quarterly employment tax returns and check that all requirements have been met.
4. Seek reimbursements for paid sick leave under FFCRA if applicable. According to the IRS, “eligible employers that pay qualified leave wages will be able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, rather than depositing them with the IRS.”
5. Maintain proper records. All businesses are required to maintain payroll records of each employee including accurate accounts of hours worked, regul
ar wages, overtime, holiday and vacation pay, and bonuses. Tax authorities may require you to supply this documentation to support your reports and tax payments.
6. Make repayment plans. After you wrap up year-end 2020, make plans to repay any payroll taxes that were deferred in 2020. There are different deadlines and payment schedules for both employers and employees to repay those tax obligations.
7. Adjust your payroll system to account for changes in 2021, including the higher taxable wage base for Social Security. Tax codes and rate tables are constantly changing. Asure provides software and services that help businesses optimize payroll processing, compliance, and year-end reporting. Consult your CPA or other tax professional for assistance to ensure accuracy and compliance.
Are you ready for year-end?
Year-end payroll and tax compliance can be a stressful time for small business owners. Asure helps 60,000 small and mid-sized businesses stay on top of payroll and tax compliance — from wages, benefits, overtime and garnishments, to tips, direct deposits, FLSA, and all tax codes and jurisdictions.