COVID-19 paid sick leave and payroll tax credits: preliminary information

The Department of Labor, Treasury and IRS have released preliminary bulletins concerning the Families First Coronavirus Response Act (FFCRA) passed on March 18, 2020, an expansion of the Family Medical Leave Act:

Department of Labor:

Families First Coronavirus Response Act: Questions and Answers

Families First Coronavirus Response Act: Employer Paid Leave Requirements

Families First Coronavirus Response Act: Employee Paid Leave Rights

 

IRS:

Treasury, IRS and Labor announce plan to implement Coronavirus-related paid leave for workers and tax credits for small and midsize businesses to swiftly recover the cost of providing Coronavirus-related leave (March 20, 2020, IR-2020-57)


This guidance is limited to sick leave paid specifically to employees who meet one of six specific criteria as outlined in the foregoing links.  

The IRS indicates that further guidance will be forthcoming "next week."  There are questions surrounding the tax handling, withholding, and payroll tax "credits" that employers will be able to take.   Employers have to provide sick pay for eligible employees but do not have to take the tax credits (which if they do, appear to have to then need to be added to company business income for 2020) and there can be complications/conflicts with any existing sick leave plans and policies.

Amounts paid (subject to the per day maximums based on which of the criteria applies) represent taxable income to the employee and normal social security/medicare taxes and federal and state (if applicable) income tax withholdings apply, and are subject to normal reporting requirements; but, the employer can apparently then take gross wages, and the FICA/medicare match or some portion thereof along with applicable health insurance premiums paid relative to the sick or care-providing employee as a credit against the next payroll tax deposit that is due.  Our interpretation of how this will work, so far, is that all of the amounts paid to the employee should be treated as ordinary income and therefore all of the normal deductions would apply (there are references out there to these amounts are not being subject to FICA; that does not appear to be the case).   Normal FICA/medicare, federal and state withholding tax, and other elective deductions apply to the gross wage amounts paid (which in Advanced Accounting should be classified as "Sick pay" with possible sick pay accrual adjustments if you already have a sick leave policy).   Amounts withheld for state/local income taxes should again be processed and paid in the normal way.  Payroll tax amounts would be transferred to accounts payable as usual (PR-M in Advanced Accounting) and initially calculated in the same way.  Calculated credits for amounts related to COVID-19 sick leave benefits would then be entered as a credit memo/voucher in Advanced Accounting's AP-B which then can be taken prior to making the EFTPS tax payment. The gross wages paid along with calculated health insurance premiums and FICA/medicare matches may need to be preferably credited to a "sick leave tax credits" income account or some other miscellaneous income account when making the AP-B credit memo, rather than directly reducing any of the original expense accounts.

It is unclear what, if any, payroll withholding logic changes will need to be made depending on reporting requirements that may evolve (will these amounts for example be required to be reported separately from regular wages on W-2 forms?) nor how employers should track applicable sick leave exactly in time and attendance and payroll systems.

The law goes into effect as of April 1, 2020 and continues through the end of the year.

We stand ready to make whatever changes may be required to the Advanced Accounting 8 payroll system once further sufficient details are available (the examples currently provided are insufficient to actually institute any changes at this time) when the first payrolls in early to mid-April come into play.   Employers should plan on keeping logs and utilize additional tracking methods as well as to gather the information required as outlined in the preliminary notices. Payroll processing will not be getting any easier.

Adv 8 r3 will support IRS form 1099-NEC

Advanced Accounting 8 (release 1, i.e. r1) was released in late September of 2019.  In addition to all of the usual initial updates as well as ongoing development that continues following a major release, rather drastic changes to U.S. federal income tax withholding became final in January of 2020 which Adv 8 r2 addressed along with other changes made since r1.

We have now begun work on r3 which we expect to be available next month (or at least by then a a preliminary r3 release which has been fully tested) which will include many new updates including initial support for the "new" 1099-NEC form that users will be required to use when it comes time to file 1099 forms for 2020.

Form 1099-NEC was first used in the early 1980's and is now being resurrected.  The  Protecting Americans from Tax Hikes Act (2015) required that nonemployee compensation form reporting had to be completed by January 31 (in an effort to combat identity theft and refund fraud).  That isn't a deadline just to provide copies to recipients but also to actually file with the IRS.  And this has been the requirement with respect to form 1099-MISC  box 7 (nonemployee compensation) reporting since calendar year 2016.   For other types of miscellaneous income, the deadline is March 31 if filing electronically, otherwise by February 28.

These differing deadlines for the same form created problems for the IRS in processing 1099-MISC forms in determining whether or not they were timely filed, so much so that we are now going back to the 1099-NEC form for reporting nonemployee compensation starting with 2020.

The old box 7 for nonemployee compensation is gone.

The 2020 1099-NEC.  Nonemployee compensation is placed in box 1.

Within Advanced Accounting, nonemployee compensation will still be considered treated as "type" 6 for purposes of classifying vendors for 1099 purposes (including payments for legal services) that will now print in box 1 of the new form.   Updates to the "1099 Types" lookup in AP-A Enter/Change Vendor information as well as AP-Q Print 1099 Forms have been made to reflect the appropriate box number and form for each type. 

Transmittal form 1096 has also been revised to include a check box for 1099-NEC forms.   Each "type" continues to require a separate 1096 transmittal form, i.e. you submit 1099-NEC forms separately from 1099-MISC forms, each with their own transmittal form.

The 2020 form 1096 transmittal.  Note the 1099-NEC box to the right of 1099-MISC.

The IRS approved forms that are currently available for review can't be used to effectively test actual alignment and position relating to those items which have changed, so when those become available from forms suppliers, we will then re-test the preliminary format changes that we have now made; but we have implemented what should be all of the other related logic changes especially in the AP-Q option which allows the user to choose which of the two forms should be processed among other things.

In addition, Adv 8 r3 will include an option that will allow an end user to make changes to certain report/form layouts including the new 1096 transmittal and the supported 1099-MISC and now 1099-NEC forms in the event of issues with printer margins, alignment, etc.

An e-file option may also be added later depending on end user interest.