Unemployment, the CARES Act, and more – the tax year 2020 has been interesting.
The effects of the COVID-19 pandemic will be felt long-term in many arenas. The tax arena is no different. At the federal and state levels, tax year 2020 looks quite different than previous years.
Tax Year 2020: COVID Layoffs
In March 2020, millions of Americans were furloughed, laid off, and otherwise out of work due to shutdowns and other pandemic precautions, forcing them to file for unemployment. That, coupled with the stimulus checks that in some cases are still being sent out, means reporting income and expenses for tax year 2020 will look very different for employees.
However, employers won’t have it easy, either. In 26 states and the District of Columbia, executive orders have been put into effect that state COVID-19-related layoffs “will not be charged against employers for purposes of calculating the experience ratings that determine their UI [unemployment insurance] tax rates,” according to the Tax Foundation.
This is being done to help protect businesses from the unprecedented effects of the pandemic and area- or industry-specific shutdowns. States pay unemployment benefits from UI trust funds, which is where employers’ UI taxes go. Typically, if an employer has an unusually high rate of layoffs within their company, this employer will be hit with higher UI taxes than those businesses who have a history of low layoff rates.
For tax year 2020, more than half of U.S. states are waiving this penalty, thus preventing employers who experienced high layoff rates due to COVID from being charged for these “extra” unemployment claims.
Keep in mind, many states have not yet decided on a course of action, and six states – Arkansas, Maryland, Mississippi, Nevada, South Dakota, and Washington – have stated that employers will still be charged regularly for this year, regardless of the nature of the layoffs. For more in-depth information about this topic, click here.
Note: 1099-G for Employees
For employees, it may be a strange year for 1099-G as well. You may receive multiple 1099-Gs in the same year if you received a state or local income tax refund and you collected unemployment benefits during tax year 2020.
Independent Contractors
If you are an independent contractor who was eligible for and did receive unemployment payments during the tax year 2020, you have a few options for paying throughout the remainder of the year. If federal income tax wasn’t withheld from your unemployment payments, you can take these payments into consideration when you are paying your typical quarterly taxes.
New Tax Credits
Two new IRS tax credits are available for businesses and employees that have been severely impacted by COVID-19 this year.
Credit for Sick and Family Leave
The first new tax credit is Credit for Sick and Family Leave. This is a credit that does a few things.
For an employee who is unable to work due to caring for someone who has COVID-19 or for caring for a child because the child’s school or place of care is closed (including a private babysitter’s unavailability due to coronavirus), that employee may take up to two weeks of paid sick leave (at two-thirds their rate of pay).
Those employees caring for the child in lieu of school, daycare, or other normal childcare unavailability are also entitled to paid family and medical leave for up to ten weeks.
For eligible employers, credits are available for the full amount of required sick leave and family leave, plus health plan expenses and employer Medicare tax on the leave, from April 1, 2020, to December 31, 2020.
Employee Retention Credit
The employee retention credit is a refundable tax credit that is equal to 50% of up to $10,000 in qualified wages paid after March 12, 2020, and before January 1, 2021. Eligible employers include businesses with operations that have been partially or fully suspended due to government-sanctioned COVID-19 mandates, or those businesses with a significant decline in gross receipts when compared to the tax year 2019.
Eligible employers can reduce federal employment tax deposits in anticipation of this credit.
Payroll Tax Deferral
President Trump authorized a tax break in August 2020 that allows employees to defer payroll tax withholding until the end of the year, as a way to ease employees’ financial burdens through the rest of 2020.
But this may cause employers a bit of a headache later, as they will need to recoup this money from January to April 2021. To help assuage this issue, it may be wise to recommend your eligible employees keep withholding these funds if at all possible, as a future benefit for both employer and employee.
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