October 29, 2020
U.S. Tax Implications of Covid-19
As we’re now well into the fourth quarter of a tumultuous 2020, you may have plenty of year-end U.S. tax and payroll-related questions in connection with Covid-19-related relief efforts and stimulus payments, extra costs incurred as a result of the pandemic, and what the impact is on relocating employees and expense reporting.
Sterling Lexicon invited tax attorney and experienced employee relocation expert, Peter K. Scott, to join us in a webinar for some answers to what he aptly described as some “vexing things” to consider as a result of the global pandemic.
Stimulus and Relief Payments
Let’s start with the CARES Act of 2020 – or the $2 trillion dollar Coronavirus Aid, Relief, and Economic Security Act passed and signed at the end of March. In a nutshell, the program was designed to quickly provide economic relief payments for everyone with a social security number, in amounts phased out over increasing income levels. Full payments of $1,200 per adult, or $2,400 for married couples, plus $500 for every child under 17 were limited to those with an Adjusted Gross Income (AGI) of less than $75,000 for individuals, or $150,000 for couples filing jointly. The maximum payments were phased out up to AGI levels of $99,000 and $198,000, respectively.
The payments were designed to be an advance or credit against 2020 taxes owed, with the ultimate eligibility determined by taxpayers’ 2020 AGI levels. Given that complete tax liability is not typically finalized and filed until April of the following year, Congress enacted a plan in which advance payments were issued quickly, based on 2019 AGI levels, with the intention of making any necessary reconciliations once actual 2020 taxes were known. Here’s where it started to get tricky, however: Many had not yet filed their 2019 taxes, either, especially in light of the hiatus announced by Treasury, extending the typical filing deadline by 90 days from April 15 to July 15. In that event, eligibility and payments were based on 2018 tax filings.
What’s the bottom line?
The 2020 relief payment amounts were assessed on either 2018 or 2019 AGI levels and anticipated to be “trued up” by 2021. So, they have the potential to effectively concern four tax years: 2018-2021. Rather messy, especially if one needs to factor in relocation-related benefit payments. The good news is that IRS has announced that if the 2020 relief payments turn out to have been too high, they will not seek to recover any excess amounts. So, for example:
What about Relocation-Related Expenses?
For those employees who were relocating in 2018 or 2019, you may be wondering what, if anything, you should do as an employer if the taxable amounts of employees’ relocation benefits from their W-2s and tax returns increased their income beyond the threshold for relief.
Particularly against the backdrop of the multi-year span of this program, it’s important to consider the range of scenarios that can modify individuals’ income over time – from salary increases, to bonuses, to retirement or benefit selections and changes in marital status or the addition of children. With that in mind, Scott concludes that companies should carefully examine any requests for employee assistance based on the effects of relocation benefits to their relief payments on a case-by-case basis. For example, if an employee did not get a relief payment in 2020 because 2019 relocation benefits increased 2019 AGI beyond the threshold, that employee will still get the benefit as a 2020 tax credit, unless other factors have increased 2020 AGI beyond the threshold. Relatively few relocating employees are likely to be adversely affected solely because of their taxable relocation benefits and separating those out could be both onerous and expensive to gross-up.
The likely low impact of these scenarios was reinforced by an audience poll, in which 79% indicated that they had not been asked for any stimulus-related assistance in connection with relocation.
Tax Treatment of Expenses Incurred Due to Covid-19
Another important area for businesses to consider is what the proper tax treatment of Covid-19 related expenses is, and whether they are taxable to employees. The list of potential costs encountered is a significant and potentially long one, including such things as:
- Extra hand sanitizers, other disinfectant supplies, and masks
- Childcare or tutoring expenses due to closed schools
- Extended temporary living for stranded and/or quarantined employees
- Unreimbursed health-related copays and deductibles
- Home office equipment
- Alternative modes of commuting for those who do not wish to or cannot use mass public transport systems
For those relocating, that list can also extend to such things as:
- Extra costs for entry or exit from foreign jurisdictions (visa restrictions, quarantines, travel restrictions)
- Temporary food and lodging expenses for employees whose relocation is suspended or delayed during the pandemic but who have already vacated their home
- Extra home purchase settlement costs resulting from lack of in-person execution or filing of documents
- Extra household goods expenses, such as additional in transit storage or surcharges resulting from special pandemic procedures
- Extra loss on sale
Scott confirmed that all the Covid-19 examples outlined here are deductible business expenses, defined as anything ordinary and necessary in the conduct of a trade or business. Those that are directly tied to the support of employees need more careful analysis as to whether they are taxable employee benefits, and relocation-related expenses generally fall into that taxable category. The only exceptions are those home sale and purchase costs that are incurred in programs that qualify under now widely accepted IRS conditions and rules.
Is there any recourse for exceptional costs related to Covid-19?
You’ll be pleased to know that the answer is yes.
Knowing that most relocation-related costs are considered taxable benefits, and many companies choose to gross-up that tax exposure to help employees offset them, is there any recourse for exceptional costs related to Covid-19? You’ll be pleased to know that the answer is yes. Invoking the power of the Stafford Act, President Trump declared a national emergency on March 13, 2020, triggering a relief provision in the Internal Revenue Code (IRC) known as Section 139.
Without getting too far into the complexities of tax law, Section 139 lays out a very wide scope of covering payments to or for the benefits of individuals for reimbursement of necessary and reasonable expenses in connection with qualified disasters. Such disaster payments are not considered taxable income to the recipient unless
- They are compensated by insurance, or
- They are substitutes for regular wages (i.e., sick leave)
While Section 139 does not specifically require written substantiation of the payments, and there are no limits on the frequency or the amounts of relief support, it is essential that any such payments fall under the definitions of “necessary and reasonable.” It is therefore recommended that businesses establish company-wide rules and processes around who is eligible, what types of expenses are covered and whether there will be a maximum or cap. Careful management and tracking of the use of the provision is advisable, as is requiring written justification for any relief payments from employees or third parties paid on their behalf through this provision.
Although none of the 50 states has a direct counterpart to Section 139 in their laws, most conform to the Federal code. All currently accept the exclusion and do not tax these relief benefit payments.
Deferral of Employee FICA taxes
Following the breakdown of further stimulus and relief efforts in Congress, President Trump issued four executive orders on August 8, seeking to provide additional help. One of those would allow employers to defer collecting the 6.2% of an employee’s portion of the Federal Insurance Contributions Act (FICA) taxes that fund Social Security and Medicare benefits. Scott outlined several things that are potentially problematic in the order, including:
- A short window of and income restriction applicability – it is effective September 1 – December 31, 2020, and applies to employees with bi-weekly wages of $4,000 or less
- It does not cover Medicare tax
- It is a true deferral, meaning it is not forgiven and would eventually have to be collected
- It is described as voluntary, but it’s unclear whether that means by the employer, the employee or both
- If employees can opt in or out, it will be very difficult for employers to implement
- It is unclear what the impact would be on social security benefits during the time of deferral, and if employees will get credit for that period of service, how it will be determined
The Federal Government took the position to implement the program on a mandatory basis for all agency personnel, but data suggests that most private sector employers have opted not to implement it, and several industry groups urged their members against it. This inclination was also evidenced by an audience poll, in which 79% of respondents indicated that their organization had decided not to defer the taxes.
There’s no doubt that 2020 is presenting plenty of challenging scenarios for employees and employers alike. We’re committed to helping you navigate them. If you have any additional questions, or need support, let us know how we can help.
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Kristin is Sterling Lexicon's Senior Manager, Content and Campaign Strategy, where she brings more than 25 years of experience in global workforce mobility, marketing, editorial planning and communications to her role. Before joining Sterling Lexicon, she worked for many years at Worldwide ERC® in collaboration with cross-departmental teams and industry stakeholders to develop in-person and virtual event program, website article and print publication content, including Mobility magazine. Contact Kristin at firstname.lastname@example.org.