Payroll Tax Guide for 2020 Year End

In a 2019 survey, 52% of employers said they outsource payroll tax processing, while 48% said they do it in house. If you’re in the latter (in-house) group, you know that payroll tax processing can be chaotic without a detailed guide, especially at year end.

With the 2020 year end imminent, we developed a guide exclusively for 2020 payroll taxes. This nonexhaustive guide covers:

• Employee payroll tax rates
• Employer payroll tax rates
• Pretax and post-tax deductions
• Taxes on reimbursements
• COVID-19: Payroll tax relief
• Payroll tax deposits and reconciliation
• Payroll tax reporting: forms and deadlines

Employee payroll tax rates

2020 federal tax withholding rates

• Federal income tax = the employee’s Form W-4 + the IRS’ withholding tax tables
• Social Security tax = 6.2% of taxable wages, up to the annual wage limit of $137,700
• Medicare tax = 1.45% of all taxable wages
• Additional Medicare tax = 0.9% of taxable wages over $200,000
• Supplemental tax rate = 22% on annual supplemental wages of up to $1 million (optional), and 37% on annual supplemental wages over $1 million (mandatory)

State and local withholding requirements vary by jurisdiction, but may include:

• State income tax
• Local income tax (e.g. city, county, and school district taxes)
• State unemployment (SUTA) tax
• State disability insurance and state taxes on supplemental wages
• Reciprocal tax agreements for employees who live and work in different states

Ensure each employees’ taxes for 2020 are withheld according to federal and applicable state and local guidelines.

Ensure each employees’ taxes for 2020 are withheld according to federal and applicable state and local guidelines.

Employer payroll tax rates

2020 federal requirements

• Social Security tax = 6.2% of taxable wages, up to the annual wage limit of $137,700
• Medicare tax = 1.45% of all taxable wages
• Federal unemployment (FUTA) tax = 6% on the first taxable $7,000 paid to each employee. The rate drops to 0.6% if you qualify for the maximum FUTA credit of 5.4%.

State and local requirements vary by jurisdiction, but may include:

• State unemployment tax, up to the annual SUTA wage limit
• Employment training tax (e.g. in California)
• Local payroll taxes (e.g. Oregon transit tax)

Pre-tax and post-tax deductions

For pretax deductions:

• Identify the pretax benefits you offer — such as health insurance, dependent care assistance, health savings accounts, traditional 401(k), life insurance of up to $50,000, commuter benefits, and similar benefits under an IRS-approved plan.
• Note which taxes the pretax benefit is exempt from, as not all pretax benefits are exempt from the same taxes. Specifically, which ones are excluded from withholding for federal income tax, Social Security tax, Medicare tax, and state and local income taxes?
• Determine whether pre-tax deductions were accurately withheld from employees’ wages. When running this report, break it down by pay period.
• Do not include pretax deductions in the employee’s Form W-2 wages, as only taxable items must be included in Form W-2 wages.

For post-tax deductions:

• Identify the types of post-tax deductions your employees are subject to — such as Roth 401(k) contributions, charitable donations, life insurance over $50,000, and wage garnishment or child-support withholding.
• Include post-tax deductions in the employee’s Form W-2 wages, since they are taxable.

Taxes on reimbursements

• Ensure nontaxable reimbursements to employees (for business expenses) are done under an IRS-approved accountable plan. Otherwise, the reimbursements are taxable and should be counted in the employee’s Form W-2 wages.
• Determine taxability of other reimbursements. For example, tuition reimbursement up to $5,250 for the year is nontaxable. This means amounts over $5,250 are taxable and should be factored into the employee’s Form W-2 wages.

COVID-19: Payroll tax relief

The Families First Coronavirus Response Act (FFCRA)

• FFCRA leave wages are taxable to employees and must be included in their Form W-2 wages, as instructed by the IRS.
• Unlike employees, employers do not have to pay Social Security tax on FFCRA leave wages paid.
• Employers can claim refundable tax credits for FFCRA leave wages paid.
• If you claimed FFCRA tax credits by reducing your employment tax deposits, or if you received advance payment of FFCRA tax credits, you must account for these credits via your quarterly IRS Form 941, or Form 944 if you file annually. Note that small employers with an annual employment tax liability of $1,000 or less (and with IRS approval) can file annual returns on Form 944 — instead of quarterly returns on Form 941.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act

• Eligible employers can claim an Employee Retention Credit of 50% of up to $10,000 in wages paid to each employee.
• Employers can defer their portion of Social Security tax owed on wages paid between March 27, 2020 and December 31, 2020. This includes employers who took loans under the Paycheck Protection Program (PPP). Half of the employer’s deferred tax is due by December 31, 2021. The remaining half must be paid by December 31, 2022.
• Currently, the IRS says that employers with forgiven PPP loans cannot take tax deductions for expenses associated with the PPP loan. However, Congress may pass legislation to make these PPP expenses tax deductible, so keep an eye out for that.

Currently, the IRS says that employers with forgiven PPP loans cannot take tax deductions for expenses associated with the PPP loan. However, Congress may pass legislation to make these PPP expenses tax deductible, so keep an eye out for that.

Employee Social Security Tax deferral

• Employers can allow employees — earning less than $4,000 biweekly — to defer their portion of Social Security tax due on wages paid between September 1, 2020 and December 31, 2020.
• Employers must recover the employee’s deferred amounts at the earliest January 1, 2021 and by no later than April 30, 2021.

Some state and local governments have provided payroll tax relief, or made changes, as a result of the COVID-19 pandemic. Make sure you’re complying with any state or local rules that apply to your small business.

Payroll tax deposits

Verify if you have been:

• Making federal payroll tax deposits on time, according to the mandated deposit schedule. (Most employers must make monthly or semi-weekly deposits.) If you qualify for an exception from the monthly or semi-weekly deposit schedule, you must make your deposits by the required deadlines.
• Paying your FUTA taxes on time, typically by the last day of the month following the end of the quarter.
• Paying your state and/or local payroll taxes on time, based on the state or local revenue agency’s guidelines.

Payroll tax reconciliation

Reconcile the following:

• Your federal payroll tax deposits, with your federal returns (e.g. your quarterly 941s)
• Your state/local payroll tax deposits, with your state/local withholding returns and/or wage reports
• Employees’ final paycheck for 2020, with their federal, state, and local tax withholdings
• Employees’ final paycheck for 2020, with their Form W-2, your quarterly Form 941s (or Form 944 if you file annually), and your state/local returns and/or reports

Payroll tax reporting: forms and deadlines

• Form 941, Employer’s Quarterly Federal Tax Return. Due by the last day of the month that follows the end of the quarter. For the 4th quarter, the 941 is due by January 31.
• Form 944, Employer’s Annual Federal Tax Return. Due by January 31.
• Form 940, Employer’s Annual Federal Unemployment Tax Return. Due by January 31.
• Form W-2, Wage and Tax Statement. For the 2020 tax year, file W-2s with the Social Security Administration (SSA) and distribute W-2s to employees by February 1, 2021.
• Form W-3, Transmittal of Wage and Tax Statements. Send this cover sheet simultaneously with your Form W-2s to the SSA.
• State and local payroll tax reporting forms and deadlines vary by jurisdiction.

COVID-19 pushes IRS to revise payroll tax reporting forms

The IRS has updated Form 941 for the 2nd, 3rd, and 4th quarters of 2020 to enable employers to report wages paid under the FFCRA and the CARES Act. Moreover, the IRS has revised the 2020 Form 941 to facilitate reporting of employees’ deferred Social Security taxes. So, make sure you’re using the correct versions of the form.

For small employers permitted to file annual returns via Form 944, the IRS has designed the 2020 Form 944 to reflect COVID-19 relief changes (similar to the Form 941 changes).