As year-end approaches and Families First Coronavirus Response Act (FFCRA) benefits are set to expire on December 31, 2020, the timing of certain pay periods and pay schedules may present unexpected FFCRA compliance challenges. Employers should be aware of how they can record FFCRA tax credits and report actual FFCRA wages. Read below for various questions and answers surrounding this issue.
Q: When (and how) do FFCRA payments need to be reported?
A: Eligible employers must report the amount of qualified sick and family leave wages paid to employees under the FFCRA on Form W-2, Wage and Tax Statement. Employers must report these amounts either on Form W-2, Box 14, or in a statement provided with the Form W-2.
For more information, including optional language that Eligible Employers may use in the Form W-2 instructions for employees, see Notice 2020-54.
Q. When can the tax credits be claimed?
A: According to the IRS, an eligible employer can claim the credits once it has paid the employee for the period of paid sick leave or expanded family and medical leave, as long as the qualified leave wages relate to leave taken during the period beginning on April 1, 2020, and ending on December 31, 2020.
For example, if qualified leave wages are paid in 2021 for leave taken in 2020, those wages are still eligible for the tax credit on the first-quarter 2021 tax returns.
Q: My final pay period ends on 12/31/20, but we pay on a lag. Earnings for work in the final pay period of 2020 will not be paid until 2021. We will likely have employees use FFCRA benefits during this time. Is this an issue?
A: You will want to review how the first paycheck of the new year has been handled in previous years. Do those wages route to the new year’s W-2 or the previous year’s W-2? You will want to be sure that any FFCRA benefits are reflected on an employee’s 2020 W-2. See the recommendations below on what to address with your payroll vendor to ensure your reporting and tax credits are handled accurately for 2020.
Q. My final pay period includes time in both 2020 and 2021 (Ex. Dec 27 - Jan 9). We will likely have employees use FFCRA benefits for the week of 12/27. Is this an issue?
A: FFCRA, as it currently stands, expires at the end of the year so benefits should only be paid for hours missed through 12/31/2020. You will want to be sure that any FFCRA benefits are reflected on an employee’s 2020 W-2. See the recommendations below on what to address with your payroll vendor to ensure your reporting and tax credits are handled accurately for 2020.
Checklist for discussion with your payroll provider:
- How were the FFCRA pay codes established? Is there an expiration date? Will that impact FFCRA hours for the end of December?
- (For businesses that pay on a lag) For FFCRA hours paid in 2021 for hours missed in 2020, what steps are being taken to report these payments and tax credits correctly?
- Should your business consider setting up an additional pay cycle for 2020 that represents pay up to and including 12/31/20? If this is done, will it sufficiently cover the reporting requirements and tax credit calculations? Would it be a true payroll run resulting in payment to employees, or would it be for data purposes only and pay would be held until the next regularly scheduled pay date? Should this be a special pay run ONLY for employees claiming FFCRA benefits for that time period, or should it be for all employees for that timeframe?
NOTE: If pay date changes will occur, create a communication piece about this, so employees understand why this is being done and how it will impact their paychecks in January.
As always, your tax advisor and CPA can be additional resources in navigating the reporting and administering the tax credits associated with FFCRA benefits.