The relationship between benefits and tax may be deeper than most benefits professionals realize.
In a recent International Foundation webcast, New and Ongoing Tax Relief to Employers and Employees, speakers Lindsay Rice and Matt Kelley with Moderator Ronald Krupa, CEBS, (all senior managers at EY) shared a variety of tax relief options that may be available to your organization. Benefits professionals could have a seat at the table or even own the process of making sure the organization is implementing tax programs effectively.
What questions should benefits professionals explore regarding tax programs?
- Is the organization eligible?
- What would be the impact on the organization’s business and strategy?
- What is the interplay between tax programs to maximize any positive impact available to the organization?
What is the difference between a tax credit and a tax deduction?
Tax deductions reduce income before figuring the amount of tax owed. Tax credits are dollar-for-dollar reductions in the tax bill. Mr. Krupa explained that tax credits are bigger and better than deductions. A refundable tax credit means you get a refund, even if it is more than what you owe.
Here are some COVID-19–related tax credits your organization should be aware of.
Emergency Sick and Family Leave Tax Credits
The Families First Coronavirus Response Act (FFCRA) provides organizations with under 500 employees refundable payroll tax credits for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19 between April 1, 2020 to December 31, 2020. Workers may receive up to 80 hours of paid sick leave for their own health needs or to care for others and up to an additional ten weeks of paid family leave to care for a child whose school or child-care provider is closed due to COVID-19 precautions.
Mr. Krupa added that the employee count is determined at the time the leave was taken. This is a reason for large employers to retroactively determine eligibility as some employers dropped below 500 employees due to layoffs.
Employers are entitled to receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave. The refundable credit is applied against certain employment taxes on wages paid to all employees. Eligible employers can reduce federal employment tax deposits in anticipation of the credit. They can also request an advance of the paid sick and family leave credits for any amounts not covered by the reduction in deposits.
Many employers were more generous than required, according to Mr. Krupa, and as offices quickly shut down in March, many employers did not worry too much about tracking hours that could be FFCRA emergency paid sick or family leave. Even if the employer didn’t have a formal policy, they may still be able to take a tax credit against those wages. Mr. Krupa urged benefits professionals to go back and see what hours can be tracked retroactively.
Resource: Overview of COVID-19-Related Tax Credits for Paid Sick and Paid Family Leave [IRS]
Employee Retention Tax Credit
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, eligible employers can claim a refundable tax credit equal to 50% of up to $10,000 in qualified wages, including health plan expenses, paid from March 13, 2020 to December 31, 2020. Eligible employers are those organizations with operations that have been partially or fully suspended due to governmental orders related to COVID-19, or organizations that have a 50% decline in gross receipts compared to 2019. In Ms. Rice’s experience, most employers were impacted by suspended operations. Tax-exempt organizations are eligible. Paycheck Protection Program (PPP) loan recipients may not receive an employee retention credit, regardless of whether and when the loan is forgiven.
Qualifying wages are based on employer size in 2019.
- Employers with fewer than 100 employees: The credit is based on wages paid to all employees, regardless of whether they worked. If the employees worked full-time and were paid for full-time work, the employer still receives the credit.
- Employers with more than 100 employees. The credit is allowed only for wages paid to employees who did not work during the calendar quarter.
The amount of qualified health plan expenses used in determining qualified wages generally includes both the employer portion and employee pretax salary reduction contributions.
Ms. Rice predicted there would not necessarily be an extension of the employee retention tax credit depending on what happens with the COVID-19 pandemic.
In Mr. Kelley’s experience, almost all employers are claiming this tax credit on a retroactive basis, so it makes sense for benefits professionals to go back and double-check eligibility.
Resource: FAQs: Employee Retention Credit under the CARES Act [IRS]
Telework Due to COVID-19 Brings Tax Considerations
In tax law, a nexus is a relationship between a taxing authority, such as a state, and a business. States determine their own rules. In general, companies are considered to have nexus in a state for purposes of all taxes imposed by that state if they have employees working in the state. Many states consider a company to have nexus because of the in-state presence of a single home-office employee.
The COVID-19 pandemic created a boom in telework as offices shut down. For employees who live in one state (e.g., New Jersey) but work in another (e.g., New York), their employers may find themselves, for the first time, having home-office employees present in a new state with new tax liability.
Many states have decided that they will not assert nexus over a company solely due to an in-state physical presence from employees temporarily working from home. Again, telework taxing is another area for benefits professionals to monitor. As mentioned above, states determine their own rules, so a patchwork of laws may pertain to a multistate employer.
Benefits professionals may need to be concerned about tracking where home-office employees are working from to avoid potential tax issues. This could also impact recruiting and hiring processes. By giving someone permission to work from home in another state that might establish nexus in that state, an employer may now owe tax liability where they may not have previously. Benefits professionals could play a role in setting geographic parameters around telework policies. For example, employees who do not live in another state must seek permission, in advance, to work from home temporarily in another state.
Resource: COVID-19: state guide to payroll and employment tax provisions [EY]
Takeaways
Keep in mind potential tax programs as part of strategic planning. Coordination is key to tax relief. Communication in a large organization may be between departments such as tax, finance, benefits, HR and payroll. Be on the lookout for new tax incentives and go back retroactively in 2020 to analyze what the organization may be eligible for. As of this writing, it is unknown whether there will be tax credit extensions or telework tax reform.
Learn More
Tune in to the on-demand webcast: New and Ongoing Tax Relief to Employers and Employees to learn about many more “tax options to help employers do better and hire more people,” according to Mr. Kelley, including:
- Paid family and medical leave tax credit
- Empowerment zone credits
- Work Opportunity Tax Credit (WOTC)
- Disaster zone income tax credit
- Unemployment insurance expansion.
Visit the International Foundation Coronavirus Resources page to find more information for plan sponsors.
Jenny Lucey, CEBS
Manager, Reference/Research Services at the International Foundation
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