As 2020 comes to a close, employers should be aware that this year’s payroll and compensation reporting brings significant differences compared to prior years. The following summary highlights key year-end updates that employers need to consider.
New Form for Reporting Non-Employee Compensation
Form 1099-NEC replaces Form 1099-MISC for reporting 2020 non-employee compensation. Businesses that paid independent contractors during 2020 must:
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Provide recipients with Form 1099-NEC
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File with the IRS by January 31, 2021
Form 1099-MISC is still used for royalties, rents, prizes, and other non-employee income, but its layout has been revised.
W-2 Reporting of FFCRA Sick and Family Leave Wages
Employers must report qualified paid leave wages under the Families First Coronavirus Response Act (FFCRA) either:
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In Box 14 of Form W-2, or
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On a separate statement
See IRS Notice 2020-54 for detailed instructions.
Discriminatory Flexible Spending Accounts (FSAs)
COVID-19 may have caused disparities in FSA usage between highly compensated employees (HCEs) and other employees. If HCEs disproportionately used FSA funds (e.g., for child care), nondiscrimination testing may fail, resulting in taxable income reported on the HCE’s W-2.
Treatment of Unused Nonrefundable Airline Tickets
If an employee receives a nontransferable airline credit originally purchased for a business trip, the value of that credit may be considered taxable compensation under IRC Section 83. Employers should consult a tax advisor to determine the proper treatment based on the facts.
Qualified Disaster Payments (IRC Section 139)
COVID-19 was declared a national emergency on March 13, 2020, which allows employers to make tax-free, tax-deductible payments for qualified expenses. These can include:
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Health supplies (e.g., hand sanitizer)
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Remote work costs (e.g., internet upgrades, office equipment)
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Childcare or tutoring expenses
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Uninsured medical or transportation costs
No W-2 or 1099 reporting is required for qualified payments.
Leave Donation and Charitable PTO Conversions
Employees who donated unused paid time off (PTO) to other employees or charities may avoid taxation if IRS rules are followed. Under Notice 2020-46, employer-paid contributions to COVID-19 relief charities in exchange for forfeited PTO are not taxable to the employee and are not included on their W-2.
Company Vehicles and Imputed Income
Employees with access to employer-provided vehicles may see increased imputed income for 2020. If a vehicle was parked at home during the pandemic, the IRS considers that personal use. Employers must:
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Withhold FICA on the value
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Report imputed income on W-2s
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Provide timely employee notification by January 31
No current IRS relief has been issued for pandemic-related use changes.
Employer-Paid Student Loan Repayment
The CARES Act allows employers to pay up to $5,250 toward an employee’s student loans on a tax-free basis. This is only valid if offered through a non-discriminatory written plan under IRC Section 127.
Employee Benefit Plan Elections
Employees should review their benefit elections carefully for 2021, particularly for:
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Health FSAs
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Dependent care FSAs (subject to “use it or lose it”)
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Commuter benefit plans under IRC Section 132(f)
Though transit elections can be updated monthly, year-end is a good opportunity to review overall elections.
Payroll Tax Deferrals
Two deferral programs affect 2020 payroll taxes:
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Employer Share of FICA (CARES Act)
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Deferral period: March 27 to December 31, 2020
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Repayment:
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50% due by December 31, 2021
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Remaining 50% due by December 31, 2022
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Employee Share of FICA (Presidential Memorandum)
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Deferral period: September 1 to December 31, 2020
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Repayment: January 1 to April 30, 2021
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Normal withholding resumes for wages earned January 1, 2021, and beyond.
If you have questions or need assistance with year-end reporting, compliance, or planning for 2021, contact our office for a consultation.