Preparing for Payroll Year End During COVID-19

The COVID-19 pandemic has spurred numerous payroll changes in 2020, making payroll year end even more challenging than usual.

To help you stay on track at year end, we compiled a list of payroll changes impacting small businesses in 2020. They include:

• New federal overtime rule
• New Form W-4
• FFCRA-qualified leave
• The CARES Act
• Truncated SSNs on Form W-2
• 2020 leap year
• Employee Social Security tax deferral
• State and local developments

Note: It’s best practice to start preparing for payroll year end around the 1st of October.

New federal overtime rule

On September 27, 2019, the United States Department of Labor issued a final rule raising the salary threshold for “white-collar” employees. The rule took effect January 1, 2020.

Per the final rule, employers covered by the Fair Labor Standards Act must pay their exempt-salaried executive, administrative, and professional employees no less than $684 per week — increasing from $455 per week. Those who receive less than $684 per week should receive overtime pay if they work more than 40 hours for the week.

The final rule contains a few other changes, including a hike in the annual compensation level for “highly compensated employees” — from $100,000 per year to $107,432 per year.

Considerations for year end

• Your exempt-salaried employees should be getting at least $684 per week. If you reclassified any of them as nonexempt, then they qualify for overtime.
• States such as California, Maine, and New York have their own overtime exemption rules. So, make sure you’re abiding by the correct overtime exemption standards, whether federal or state.

States such as California, Maine, and New York have their own overtime exemption rules. So, make sure you’re abiding by the correct overtime exemption standards, whether federal or state.

New Form W-4

The IRS has redesigned its Form W-4, now called “Employee’s Withholding Certificate,” for the tax year starting 2020. The biggest change is that employees can no longer claim withholding allowances, which permitted them to increase or decrease their federal income tax withholding.

Considerations for year end

• You’re supposed to give employees hired as of January 1, 2020 the new (2020) Form W-4 to fill out. You do not need to give employees hired prior to that date a 2020 W-4 to complete, unless they want to modify their 2020 federal income tax withholding.
• Federal income tax withholdings based on the 2020 Form W-4 should match the IRS’ withholding tax tables for that year. If an employee hired as of January 1, 2020 fails to complete the new Form W-4, you should withhold federal income tax as though they were single with no withholding adjustments.

FFCRA-qualified leave

Under the Families First Coronavirus Response Act, employers with fewer than 500 employees must give eligible employees up to 80 hours of paid sick leave plus up to 10 additional weeks of paid family and medical leave — from April 1, 2020 to December 31, 2020.

Considerations for year end

• Verify that FFCRA leave is compensated at the correct rate, which is based on the employee’s regular rate of pay and the reason for taking the leave.
• Eligible employees can receive no more than $511 per day or $200 per day for FFCRA leave, depending on the leave reason.
• Follow the instructions provided in IRS Notice 2020-54 when reporting FFCRA leave wages on the employee’s 2020 Form W-2 and when giving employees additional information about their FFCRA leave wages.

The CARES Act

Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is a $2 trillion economic stimulus package that contains abundant (and mostly short-term) relief for businesses and individuals.

Payroll relief under the CARES Act

• Paycheck Protection Program (PPP) loans for eligible small businesses
• Provisions for tax-advantaged retirement plans, including waiving the 10% early withdrawal penalty
• Temporary suspension of wage garnishments for certain federal student loans
• Relief for employees with health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs)
• Employee retention credit for employers hit hard by COVID-19
• Deferral of employer’s share of Social Security tax owed on wages paid in 2020

Considerations for year end

• Determine which CARES Act provisions apply to you and your employees
• Double-check the effective dates for each CARES Act provision you adopted
• Reconcile your CARES Act payroll transactions, such as with employees’ pay stubs and Form W-2s and your payroll tax filings

Truncated SSNs on Form W-2s

On July 3, 2019, the IRS published a final rule, allowing employers to truncate Social Security numbers on employees’ copies of Form W-2s (and W-2cs) issued after December 31, 2020. The regulation aims to protect taxpayers against identity theft.

Since the rule is voluntary, you do not have to truncate SSNs on employees’ W-2 copies. But if you choose to do so, you must comply with the criteria set forth by the IRS.

Considerations for year end

• You can mask only the first 5 digits of the employee’s SSN. In this case, the remaining 4 digits should be revealed. When truncating/masking, follow the IRS-required format.
• You may truncate only the employee’s W-2 (and W-2c) copies. Do not truncate SSNs on W-2s to be filed with the Social Security Administration. Also, do not truncate W-2 copies to be filed with the state or local governments unless those entities allow it.
• The federal deadline for filing and distributing 2020 Form W-2s is February 1, 2021.

2020 leap year

Since 2020 is a leap year, employers with weekly- or biweekly-paid salaried employees may have an extra payday in 2020.

Since 2020 is a leap year, employers with weekly- or biweekly-paid salaried employees may have an extra payday in 2020. The extra payday applies only if your weekly or biweekly payday (for salaried employees) falls on a Wednesday or Thursday — as those 2 weekdays occur 53 times in 2020, instead of 52 times.

Considerations for year end

• Your “extra payday” verifications at year end will depend on how you handled the additional payday. Many employers simply pay their employees as normal, which means their employees literally get an extra paycheck. Others divide salaries by the number of pay periods in the year, while some reduce only the final paycheck of the year.
• Verify mandatory and voluntary deductions for employees subject to the extra payday.

Employee Social Security tax deferral

On August 8, 2020, President Donald Trump issued an executive order directing the Treasury Secretary to defer the withholding, deposit, and payment of specific payroll tax obligations.

In response, the IRS released guidance confirming that employers can let eligible employees defer their share of Social Security tax due on wages paid between September 1, 2020 and December 31, 2020.

If you extended this deferral to your employees, be sure to follow the guidance in IRS Notice 2020-65, which includes the deadlines for withholding and paying deferred amounts.

State and local developments

In response to the COVID-19 pandemic, some state and local governments enacted new laws or guidelines regarding:

• Paid sick or family leave
• Withholding taxes for telecommuters
• Work hours and wages
• Employer payroll taxes
• Fringe or pretax benefits
• State unemployment tax

These requirements vary by jurisdiction, and you’ll need to ensure your small business is complying with those applicable.

We should also reinforce that it’s crucial to begin the year-end payroll process early — again, around October 1. This way, you’ll have more time to catch and fix any issues that arise.