special report 2019 payroll year-end · 2019-11-25 · — the ninth circuit is considering a case...

Special Report

2019 Payroll Year-EndInformation provided is current as of November 25, 2019

Table of Contents1 Introduction

2 2020 Form W-4 and Withholding Methods

4 Same-Day Wage Payments

5 Gig Economy

6 Other Law Changes

7 Form W-2 Year-End Basics

8 Multistate Reporting

9 Awards, Prizes, Gifts

11 Qualified Plans

12 Nonqualified Plans

13 Supplemental Wages

14 White-Collar Overtime Rule

16 Health Savings Accounts

17 Group-Term Life Insurance

18 State and Local Paid Leave

19 Federal Limits

20 2020 Hourly Minimum Wage Rates

21 Unemployment Insurance Wage Bases

Contributing Editors Fred Basehore Senior Manager, Global Mobility Services/ Employment Tax KPMG LLP

Carly Rhodes Senior Manager, Washington National Tax/ Compensation and Benefits KPMG LLP

Scott Schapiro Principal KPMG LLP

Kathryn Corbi Research Manager Bloomberg Industry Group

Michael Trimarchi Senior Analyst/Copy Editor Bloomberg Tax & Accounting

Jazlyn Williams Reporter/Editor Bloomberg Tax & Accounting

2019 Payroll Year-End

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Year-end for payroll professionals generally starts after the next year’s inflation or indexed numbers are released in mid-October and ends after most reports and forms for the prior year are completed and filed in February. This time frame of fewer than five months encompasses two broad activities: successfully closing out the old year and establishing a strong start to the payroll process in the new year.

The steps and considerations involved in accomplishing myriad tasks in those activities are the focus of this special report, 2019 Payroll Year-End, which has been prepared jointly by employment tax and benefit professionals at KPMG LLP and payroll editors at Bloomberg Tax & Accounting.

This report covers a wide array of topics, including sections covering policy issues, changes reflecting the requirements of the recent U.S. tax code overhaul, and common concerns at year-end that have been identified as historically troubling for employers. The writers have also highlighted frequent problems in correctly reporting items on Form W-2, Wage and Tax Statement, inclusive of the reporting treatment of such items as deferred compensation, health savings account contributions, multistate wage allocation, and accounting for fringe benefits, gifts, prizes, and awards.

A list of key 2020 federal and state wage base limits, state unemployment taxable wage bases, and health savings account limits are included in a special By the Numbers section. The report also accompanies an interactive, two-page 2019 Year-End Checklist that payroll teams can share to track issues within their organization.

Payroll professionals know that starting the year-end process in October can bring unneeded pressure to collecting information that is needed to reconcile the current year’s payroll and prepare for the new year. Instead, starting the next year-end planning process in February allows a payroll team to close out the year-end process on a high note.

Year-End Policy Issues

Payroll professionals do not need surprises at year-end. The 2019 year-end and the outlook for 2020 could be interesting, given recent changes and proposals for next year. Consider and investigate the items in this report to identify potential issues and hopefully mitigate, or at least minimize, any year-end surprises.

Introduction


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The tax code overhaul (Pub. L. 115-97) suspended until January 1, 2026, the use of personal exemptions to determine individual income tax liability. The Internal Revenue Service is changing Form W-4 and withholding methods to more accurately calculate tax liabilities under the new law.

Starting January 1, 2020, employers are required to use a revised 2020 Form W-4, Employee’s Withholding Certificate, and withholding instructions in Publication 15-T, Federal Income Tax Withholding Methods, for new employees and those wishing to change their withholding. There is no compliance grace period for implementing the new form and methods.

The New Form W-4

The 2020 Form W-4 outlines five steps for reporting tax-filing status, whether household members hold multiple jobs, dollar amounts for other income that would not have withholding, and anticipated tax credits and deductions. The form also allows for additional withholding amounts to be applied each pay period.

New hires and employees who need to adjust withholding are required to file the revised form starting January 1, but employers must honor valid forms that are on file if changes are not needed. Employers may ask, but may not require, employees to replace existing forms, and may not treat employees with older forms as failing to submit a Form W-4.

If a new hire who is first paid wages in 2020 fails to submit a valid Form W-4, employers are to withhold using the ‘‘single’’ filing status on the 2020 form, with no other adjustments.

Form layout: The 2019 Form W-4’s Line 5 for the total number of allowances is to be replaced on the 2020 form by Steps 3 and 4 for employees to indicate dollar amounts to adjust withholding. The new form also introduces an option in Step 2 for employees to request a higher withholding rate. Steps 2, 3, and 4 may be skipped if they do not apply to the employee.

• Step 2: Employees may use this field if they work more than one job at the same time or are married filing jointly and their spouse also works. Additionally, employees with privacy concerns are encouraged to use the Step 2 options to avoid reporting amounts on Steps 4a and 4b. The instructions recommend that only employees with two jobs in their household check the higher withholding rate box in Step 2c.

• Step 3: Employees enter the amount of tax credits that they expect to claim. This amount reduces the amount of tax withheld annually.

• Step 4a: Employees enter the amount of other estimated income that does not come from a job. This amount increases the total annual amount of taxable wages.

• Step 4b: Employees enter the amount of deductions that they expect to claim other than the standard deduction. This amount reduces the total annual amount of taxable wages.

• Step 4c: Employees enter any additional tax amount to be withheld each pay period. Step 4c would replace the current form’s Line 6, and the wording of that field generally would not change.

Employees only would enter amounts on Steps 3, 4a, and 4b for one job in the household. The instructions recommend that these lines be completed for the highest-paying job to ensure more accurate withholding.

Publication 15-T

Publication 15-T has five withholding worksheets for employers and includes information on revised percentage-method and wage-bracket method tables for calculating federal income tax withholding.

The automated percentage method is the only method that allows for withholding for 2019 forms and 2020 forms using one set of tables. Year-specific methods must be used with the corresponding forms, or withholding calculations will be inaccurate.

The automated percentage method also is the only method that requires annualizing wages. The four manual methods calculate tax based on wages paid per pay period.

Withholding using 2020 Forms W-4: All withholding methods compatible with 2020 Forms W-4 include a fixed amount of wages exempt from withholding instead of allowance amounts based on the number of personal exemptions claimed by an employee. The equivalent of zero, two, or three allowances is factored into Publication 15-T withholding methods for 2020 forms, depending on the employee’s filing status and whether the box in Step 2c is checked. For Forms W-4 with the Step 2c box checked, the fixed amount is zero.

Withholding using 2020 Forms W-4 also requires adjustments depending on any amounts included in Steps 3, 4a, 4b, or 4c. For each worksheet compatible with 2020

2020 Form W-4 and Withholding Methods


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forms, tax credits reported in Step 3 are divided into amounts per pay period and subtracted from tentative withholding amounts, while any additional withholding per pay period is added. In the worksheets for manual methods used with 2020 forms, other income amounts and deduction amounts are converted from annual amounts into pay period amounts.

All methods for use with 2020 forms have a standard withholding rate schedule and a higher withholding rate schedule. The higher withholding schedule is to be used with 2020 Forms W-4 with the check box in Step 2c selected.

The tables for 2020 forms also contain schedules for those claiming head-of-household status.

Withholding using older Forms W-4: Withholding allowances claimed on Forms W-4 issued before 2020 are to continue to apply, unless a change is needed. Employers are to calculate withholding without needing to convert information provided on older forms into information requested on the revised Form W-4.

Each withholding method that may be used for forms issued before 2020 requires subtracting from wages the number of allowances claimed, multiplied by an allowance amount.

The wage-bracket method tables and manual percentage-method tables for older forms are to have the same structure as those in effect for 2019, with no changes to the calculation of the amount of tax to withhold.


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One of the top five priorities for employers in 2019 was to offer same-day pay options for employees, a survey by Paychex Inc. showed, with 10% of respondents favoring this option. Although payroll essentially has not changed in more than 200 years, a new generation of young workers who have championed the need for immediacy want the same for wage payments.

A number of fast-pay companies that serve the marketplace offer employees access to up to 50% of earned wages to ensure that enough funds remain in a bank account to allow the payment. At least one provider funds the entire payment to participating employees. Increasingly, gig-economy jobs often allow workers to access pay at the end of a shift.

Aside from having adequate available funds, there are other concerns for employers: mandatory deductions, such as garnishments, liens, withholding for child-support payments, and lock-in letters from the Internal Revenue Service. A key issue involving constructive receipt has been raised by some employers—would such payments require payroll deposits to be made the same day? Overtime compensation, too, is among the concerns.

The growing trend in on-demand wage payments prompted the American Payroll Association to ask the IRS to publish guidance on how to apply income tax withholding, deposits, and reporting requirements to fast-pay options.

Same-Day Wage Payments


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As the gig economy grows, so does the number of lawsuits that claim on-demand companies misclassify drivers and other workers as independent contractors, who are not entitled to federal protections for overtime pay, workers’ compensation, and unemployment benefits. Among the cases:

— The Ninth Circuit is considering a case against GrubHub, a leading online and mobile platform for ordering takeout meals. GrubHub faces the possible reopening of a case that was ruled in its favor. The case (Lawson v. Grubhub, Inc., 2018 BL 438360, N.D. Cal., No. 3:15-cv-05128, order 11/28/18) was the first worker-status lawsuit involving the gig economy to reach trial. In the trial, a former delivery driver lost his claim that he was misclassified as an independent contractor under California laws. The case was put on hold in September after the Ninth Circuit asked the California Supreme Court to determine whether its landmark worker classification rule, as stated in Dynamex Operations West Inc. v. Superior Court, applied retroactively.

— A lawsuit filed against Uber claimed the ride-sharing company has not repaid taxes it deducted from the fares of 96,000 drivers in New York. The drivers said the company violated contracts by deducting taxes from drivers’ cut of fares, on top of service fees of 20% to 28%. In 2017, Uber acknowledged that it underpaid New York drivers by wrongly deducting the company’s percentage cut of fares after taxes and surcharges were added to the fares, rather than taking it from the lower, pre-tax amount. The case is Aleksanian v. Uber Technologies, Inc., S.D.N.Y., complaint filed 11/6/19.

— The on-demand grocery-delivery service Instacart is facing a lawsuit in Illinois from drivers, delivery workers, and personal shoppers who claim the service is misclassifying workers to avoid complying with the federal Fair Labor Standards Act and state labor laws. The lawsuit claims Instacart dictates, manages, and controls virtually all aspects of the group’s jobs, making them employees, not independent contractors. The case is O’Shea et al v. Maplebear Inc., N.D. Ill, No. 1:19-cv-06994, 10/23/19.

The gig economy generally encompasses temporary jobs that provide a great deal of flexibility for workers, who are paid for their services and do not work for any one employer. In short, these workers are considered independent contractors.

Questions surrounding the treatment of independent contractors vs. employees are not new. However, growth of the gig economy, and its use of nonemployees, has raised the level of scrutiny on such worker treatment.

Independent contractors have their compensation reported to them annually via Form 1099-MISC, Miscellaneous Income. However, this is subject to change for tax years starting January 1, 2020, with the IRS’s new Form 1099-NEC, Nonemployee Compensation. While Form 1099 reporting is not generally in the purview of the payroll department, the nature of the gig economy does not always result in consistent treatment of workers between organizations, or even in the same company. Taken a step further, some businesses might have the same person performing services as an employee and as an independent contractor in the same year, a situation that may raise a red flag for tax authorities.

Because the year-end payroll process included preparing Forms W-2 and testing them for compliance, payroll professionals may want to consider cross-matching Forms W-2 with Forms 1099 MISC to identify workers who may be receiving both forms in the year. A review may be initiated to confirm the proper treatment.

Gig Economy

https://src.bna.com/ypI

https://src.bna.com/ypI


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Section 125 crossing years: Sometimes, after employees’ returns from leaves of absence, money is owed to the employer for pre-tax medical benefits. If the deduction continues into 2020 for amounts owed on insurance coverage from 2019, it must be a post-tax deduction. The employee cannot pay for benefits on a pre-tax basis in a different year than the coverage.

Paid family leave: Employers and payroll professionals also should be aware of new tax benefits for providing paid family and medical leave to qualified workers (through tax years starting in 2019)1 and for allowing some privately held companies to grant stock options and restricted stock units with special tax advantages to qualified employees.2

State and local requirements: The focus at year-end for payroll involves the true-up not only for federal tax requirements but also applicable state taxes. Note that while most states that have income taxes generally conform to federal definitions, there can be some significant differences. California and New Jersey, for example, do not follow the federal exclusion for contributions to health savings accounts.

Several states continue to exclude from income some employer-paid moving expenses. These differences, if identified early enough, can translate to a smoother state year-end process, and mitigate post-close issue identification and filings of Form W-2c, Corrected Wage and Tax Statement.

States continue to react to changes in the federal tax requirements that affect payroll. Oklahoma, for example, no longer accepts the federal Form W-4, Employee’s Withholding Allowance Certificate, for state purposes. New York instituted a volunteer corporate payroll tax in reaction to the newly imposed $10,000 state tax deduction limit for individuals.

Some states have started to enact legislation requiring that certain payments by third parties, such as pharmaceutical companies, be counted toward cost-sharing requirements under applicable health plans, including annual deductible requirements. Employers should consider whether these rules apply and the potential effect on the employer’s ability to offer a high-deductible health plan for federal tax purposes and, therefore, insureds’ eligibility to participate in a tax-favored health savings account.

1 Internal Revenue Code (I.R.C.) Section 45S2 I.R.C. Section 83(i)

Keep in Mind

Moving expenses are still 100% taxable through 2025, except for active military. However, state policies differ on moving expenses, so they should be monitored. Several states do not follow federal treatment on such expenses and may exclude taxes on the benefit.

Qualified transportation fringe benefits may still be provided tax-free to employees, except for bicycle commuting, up to stated monthly limits. Employers, however, may no longer take a deduction for most expenses related to providing this type of benefit, except in limited circumstances. As a result, some employers are making changes to transportation benefits programs and policies, which may affect taxability to employees.

Family- and medical-leave credits may still be available for some employers, based on wages paid to qualifying employees while on leave. Specific conditions and requirements must be met. The credit no longer is available for wages paid in employer tax years starting after December 31, 2019.

For other taxes related to payroll, several jurisdictions are using withholding on employee wages to fund paid-leave programs or, in the case of Oregon, a new payroll tax to fund the state’s transportation infrastructure program.

Also at year-end, payroll professionals must monitor and properly account for such items as minimum wage, paid-leave requirements, unemployment insurance, temporary disability, and workers’ compensation, all of which are administered on a state and local basis.

On the horizon: Federal and state legislatures return to work in early 2020 with agenda items that include new laws and requirements that affect payroll. Later in this report, prepare for the January 1, 2020, change to increase the white-collar overtime exemption threshold. You can stay informed with KPMG and Bloomberg Tax & Accounting for coverage of new developments.

Other Law Changes


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The timely processing of accurate Forms W-2 is a key function of any payroll department. However, there are several potential pitfalls that can easily derail this most basic of requirements.

Form W-2 formatting: A common mistake is filing Forms W-2 labeled with the incorrect year. A 2019 form must be used and filed by January 31. Entries for approved print copies are to be in 12-point Courier font and black ink. Dollar amounts are to have a decimal point and two decimal places. Do not use a dollar sign or commas. Test the form to ensure that no negative dollar amounts are reported.

Social Security numbers: Ensure that Social Security numbers have nine digits. Truncating Social Security numbers on Forms W-2 was not approved for 2019. The employee forms for tax year 2020 to be filed in 2021 will allow employers the option of truncating the Social Security numbers.

Employee name: The Social Security Administration will not process Forms W-2 with misspelled names, incorrect formatting, and Social Security numbers that do not match those in the Social Security Administration (SSA) system. Consider using the SSA’s Social Security Number Verification Service, which is fast, easy, and accurate.

Balance checks: Dollar limits exist for some boxes. Examples for 2019 include:

• Box 3, Social Security wages, should not exceed $132,900;

• Box 4, Social Security tax withheld, should not exceed $8,239.80; and

• Box 12, Codes D and E should not exceed $19,000 for employees younger than 50 and $25,000 for employees 50 and older.

Codes: Codes for Box 12 may be a challenge. Report as Code DD, the combined cost of the employer-provided health coverage—the employee and employer portions. Similarly, Code W is to include all employer contributions, including an employee’s contributions through a cafeteria plan, to a health savings account. Ensure that earnings and deductions requiring Box 12 reporting include the correct code, especially after a system upgrade.

State and local reporting: Include state account numbers in Box 15 and follow special state reporting rules.

AccuWage Online: SSA can check Form W-2 files before submission for common problems and provide a report on issues that may prevent the submission from being accepted.

Form W-2 Year-End Basics


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Handling the wage and tax allocation/reporting at year-end for the cross-border business traveler may be onerous and technically challenging. Employers of multistate workers and their third-party providers need to effectively manage the overall compliance issues associated with state-to-state, short-term travel and work.

When working through the complexities of multistate withholding, also consider the different tax treatment of various types of income, such as base compensation, bonus payouts, and equity compensation. Employers need to know to apply, by state, any de minimis treatment, reciprocity, and specific compensation reporting methodologies.

Note: Effective January 1, 2020, Illinois institutes a 30-day de minimis rule with respect to inbound employees.

Employers need to capture all the employee-level data detailing how many days each employee performed services in the states where work was performed. If the travel data was tracked throughout the year and the employee’s pay allocated accordingly, time in December may be used to make adjustments.

December also is a good time to communicate the issue of nonresident taxation to the affected employees.

Reminder: Form W-2 has space to include wage and tax amounts for up to two states. If three or more states are involved, a multiple Forms W-2 will be necessary. See the IRS Form W-2/W-3 instructions for details.

Amounts in Box 16, State Wages, should take into account unusual reporting requirements. For example, New York requires the amount in Box 16 to be the same as the wages in Box 1. When reporting two states including New York, the total of both Box 16s will not match Box 1. This may confuse employees, and so employers should consider providing an explanation to employees when delivering Forms W-2.

The explanation also could be used to alert the employee that they may want to seek help from a tax advisor because they may need to file more than one state individual income tax return.

Multistate Reporting


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The general nature of the federal tax code is to include the value of all items provided to employees as taxable compensation reported on Forms W-2, unless the items may be excluded by law, regulation, or agency position. Many employers get this wrong, especially at year-end.

Below is a synopsis of some of the items that may be excluded from pay and reporting.

Length of Service, Safety Awards, Gifts

The value of tangible employee achievement awards, such as length-of-service awards and safety awards, may be excluded from wages and reporting, provided certain requirements are satisfied and subject to certain limitations.3 For example, the award must be presented in a meaningful ceremony and the circumstances must not indicate a likelihood that the award is disguised pay.

Awards are made under a qualified plan or nonqualified plan, which have different requirements and carry different limitations. Awards to a single employee in a year are limited to $400 if not made under a qualified plan; the cumulative amount of awards given to an employee under a qualified plan are limited to $1,600 in one year, with the average cost of all awards made by the employer not exceeding $400.

The tax code overhaul (Pub. L. 115-97) expanded upon the tangible item issue to clarify that cash and cash equivalents; gift cards, coupons, and certificates; vacations; meals; lodging; tickets to theater and sporting events; stocks, bonds, and securities; or similar items are not excluded tangible property and the value of these awards must be included as income.

A length-of-service award must be in recognition of at least five years of service, and provided the employee did not receive an award in the previous four years. Gifts to those who are retiring are considered length-of-service awards and may be excluded from income to the extent they meet the rules and limitations discussed above.

3 I.R.C. Section 274(j)4 IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits5 Treasury Regulation Section 1.132-6(e)(1); IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits

For safety awards to be considered tax-free to employees, up to 10% of employees may qualify for the award. Awards to professional, administrative, and clerical employees are not eligible for tax-free treatment. Employers seeking to recognize a portion of employees with tax-free safety awards when more than 10% are given awards are out of luck. Because it likely would be difficult to determine the employees who were among the first 10%, none of the employees would be eligible for the income exclusion.

Awards for employee suggestions generally are taxable and subject to withholding and employment taxes.

Gifts to employees are included in income and reporting is required, with some exceptions as described by the federal tax code and IRS and Treasury Department regulations. Gift cards or gift coupons (see below) that may be redeemed for cash amounts have been ruled as always taxable by the IRS.4

Exceptions lie in terms payroll professionals should be familiar with: de minimis benefits, or working-condition fringe benefits. Many tangible items provided by employers to employees may be excluded from taxability to the employee if these criteria are followed:

• the item is of low value, although the term is not defined by the IRS;

• the item’s value must be difficult to determine or administratively impracticable to track and apply to the employee; and

• the benefit is occasional and not consistently awarded.

There are lists of other items that may remain de minimis despite possibly not meeting all the criteria above. These tangible items include traditional birthday or holiday gifts of property, excluding cash, with a low fair-market value. (Congress noted that a turkey given during year-end holidays falls into that category.) Additionally, flowers, fruit, books, or similar property may be provided to employees under special circumstances (for example, because of illness, outstanding performance, or family crisis), according to Treasury regulations.5

Awards, Prizes, Gifts


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Gift Coupons

Employers need to pay attention to gift-coupon arrangements. An IRS technical advice memorandum concluded that an employer-provided gift coupon with a defined face value of $35 could not be excluded from income as a de minimis fringe benefit.

As detailed in the memorandum, an employer that previously provided employees with tax-free hams, turkeys, or gift baskets as annual holiday gifts changed its program and distributed $35 gift coupons redeemable for grocery products at select nearby stores.

The IRS ruled that the gift coupons were to be included as compensation and reported on Forms W-2 because such cash-equivalent fringe benefits have a readily determined value, regardless of whether they may be converted to cash. In short, it was not administratively impracticable to account for the coupons; they had a face value of $35.6

6 Technical Advice Memorandum 200437030


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Qualified deferred compensation plans generally refer to traditional retirement plans, such as Section 401(k) and pension plans.

The Internal Revenue Code details the limits of a defined contribution plan, including 401(k) plans, for all annual plan additions, such as employer contributions, employee contributions other than rollovers, and allocation of forfeitures. This limit is set at the lesser of $56,000 for 2019 ($57,000 in 2020) and 100% of the participant’s compensation.7

The participant’s compensation must be determined under the code even when a different definition is used for the plan, such as when calculating the rate of employer contributions. Catch-up contributions for participants who have reached age 50 during the year are not included in the $56,000 limit in 2019. (The 2020 limit is $57,000.)

Note that the limitation year under the plan may not be the calendar year.

The elective deferral limit is $19,000 for 2019 ($19,500 in 2020).8 Corrections are needed when there are excess deferrals, such as when an individual defers compensation in excess of the limit that may not be applied as a catch-up contribution. Corrections generally take the form of distribution of the excess as well as any allocable earnings.Participants who are 50 and older at the end of the year can make an additional “catch-up” contribution up to $6,000 in 2019 ($6,500 in 2020).

7 I.R.C. Section 415(c)8 I.R.C. Section 402(g)9 I.R.C. Section 415(b)

If excess deferrals are not corrected in a timely manner, the participant may have additional taxable income and the plan’s tax qualification status may be at risk.

Under the I.R.C., there is another limit for defined benefit plans which, when expressed as an annual benefit, is the lesser of $225,000 for 2019 ($230,000 in 2020), and 100% of the participant’s average compensation for three consecutive highest-paid years.9 A defined benefit plan’s formula to determine annual benefits typically does not allow for a situation when the compensation limit would be exceeded, though the plan actuary still would likely monitor benefit payments for compliance.

For Form W-2 reporting, employers are to exclude from Box 1 wages, tips, other compensation, and the amounts deferred from pay by employees pre-tax into a qualified plan during the year, up to the annual limit. These amounts are not excluded for reporting wages in Box 3, Social Security wages, up to the wage base limit of $132,900 for 2019 ($137,700 in 2020), and also must be included in Box 5, Medicare wages and tips. There is no wage base for Medicare contributions.

Box 12 includes codes to identify payments and deferrals. In Box 13, “Retirement plan” should be checked if the employee is an active participant in a qualified retirement plan for any part of the year. In other words, this box should be checked if the employee is covered for the tax year by a defined benefit plan and eligible to participate, or covered by a defined contribution plan and any employer or employee contributions are added to the employee’s account.

Qualified Plans


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Nonqualified deferred-compensation plans may require administering income tax and Federal Insurance Contributions Act (FICA) taxes in different years.10 This may apply to arrangements that provide a right to payment in a future year, such as excess benefit plans, supplemental executive retirement plans, salary and bonus deferral arrangements, restricted stock units, or phantom equity awards.

The nonqualified plan amounts generally are subject to FICA taxes in the year they become vested under the special-timing rule, but income taxation is generally delayed until amounts are paid or distributed.

Separate tracking may be needed for plans that provide for accelerated vesting upon a certain event, such as retirement, because participants may become vested and subject to FICA outside of the plan’s general vesting schedule.

Vesting provisions may require that deferrals become vested over a period of years. Such deferrals may be subject to FICA over multiple years, even if later paid out as a lump sum or distributed as a single event. Employers should consider whether plan amounts may vest and be paid in different years, and whether any amounts became vested but were not paid out in 2019.

For plan amounts that vested earlier this year and are to be paid or distributed in future years, it may not be too late to take action for 2019. Under the special rule, employers may choose to take a deferred amount into account for FICA tax purposes on any date later than, but within the same year

10 I.R.C. Section 3121(v)

as, the date the amount was subject to FICA taxes. Once an amount is taken into account under the rule, later payments and earnings generally are not subject to FICA tax. In certain cases, the amount taken into account for FICA may be estimated within three months, if interest is included.

Box 11 is used to explain discrepancies between Box 1 and Boxes 3 and 5 by reporting one of the following:

• the amount of a distribution that is included in Box 1 but was taken into account for FICA purposes in a prior year, or

• the amount included in Boxes 3 and 5, although not yet subject to income tax.

Do not report amounts in Box 11 if there is a deferral and a distribution in the same year.

If nonqualified compensation amounts were vested in a prior year and not previously taken into account for FICA taxes, the approach for when and how to handle this may depend on when the amount became vested.

Additionally, employers may report current-year deferrals and earnings under nonqualified deferred-compensation plans subject to I.R.C. Section 409A in Box 12 using Code Y. However, Code Y reporting remains optional for 2019. If any amount of nonqualified deferred compensation must be included in income because of a Section 409A failure, it should be reported in Box 12 using Code Z, in addition to Box 1.

Nonqualified Plans


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Payroll professionals often handle special bonuses or other supplemental pay at year-end or early in the following year. Here are tips on how to be ready when the word comes down that bonuses need to be paid out.

For total supplemental pay up to $1 million in a year for any employee, employers must determine use of either the aggregate method of withholding or the optional flat-rate withholding method, and should consistently apply that methodology for each individual. There is no penalty for changing methods, but to allow employees to decide can be administratively impracticable.

The aggregate method combines supplemental wages with regular pay and tax is withheld using the applicable withholding tables for the payroll period in which the aggregated wages are paid. Such additions to pay may mean the total amount is taxed at a higher rate for that particular pay cycle than the rate normally applied for the employee.

Those applying the optional flat-rate withholding method are to use a 22% withholding rate. Income tax must have been withheld from regular wages of the employee during the calendar year of the supplemental pay or the preceding year

in order to use this flat-rate method. The supplemental wage payment must either not be paid concurrently with regular wages or it must be separately stated on payroll records.

For accumulated supplemental wages exceeding $1 million, the employer is mandated to withhold at 37%. Employers have no option to use the aggregate method for amounts exceeding $1 million. If before a supplemental payment, the employees’ accumulated supplemental amounts were less than $1 million, and this payment would cause them to exceed the $1 million threshold, the employer has two choices:

a) Tax the amount that is less than $1 million at 22% and the amount that exceeds $1 million would be taxed at 37%, or

b) The entire amount can be taxed at 37%.

The flat-tax rates were reduced starting in 2018 by the tax code overhaul. Ensure your systems have been correctly applying the 22% and 37% rates.

Many states also allow flat-rate withholding for supplemental pay. For state income taxation, see the state supplemental wage chart.

Supplemental Wages

States With Flat Supplemental Wage Rates (2020)

State Withholding Rate

Alabama 5%

Arkansas 6.9%

California 6.6 or 10.23%

Colorado 4.63%

Georgia 2 - 5.75%*

Idaho 6.925%

Illinois 4.95%

Indiana 3.23%

Iowa 6%

Kansas 5%

Kentucky 5%

Maine 5%

Maryland 3.2 - 8.95%*

Michigan 4.25%

Minnesota 6.25%

Missouri 5.4%

State Withholding Rate

Montana 6%

Nebraska 5%

New Mexico 4.9%

New York 9.62%

North Carolina 5.35%

North Dakota 1.84%

Ohio 3.5%

Oklahoma 5%

Oregon 9%

Pennsylvania 3.07%

Rhode Island 5.99%

South Carolina 7%

Vermont 6.6 - 11.1%*

Virginia 5.75%

West Virginia 3.0 - 6.5%*

Wisconsin 4.0 - 7.65%*

2020 rates listed are subject to change * rates vary by amount or type of payment


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The weekly salary threshold for the white-collar overtime exemption was last adjusted in 2004, when the Labor Department changed Fair Labor Standards Act (FLSA) requirements for executives, professionals, and administrative employees.

On January 1, 2020, the white-collar overtime standard salary threshold is to rise to $684 a week, or $35,568 a year, from $455 a week, or $23,660 a year. The rule, which the Labor Department issued September 24, 2019, also increases the salary threshold to $107,432 a year from $100,000 for highly compensated employees to qualify as overtime-exempt white-collar employees (RIN: 1235-AA20). More than 1 million salaried workers who now meet the white-collar exemption rules no longer would be exempt under the new regulations.

Overtime compensation: Under current rules, employees who are paid on an hourly basis generally are entitled to overtime pay, regardless of the amount of compensation they receive. Salaried nonexempt workers must be paid overtime pay as well, unless they are exempt from such compensation.

The three common white-collar exemption categories apply to employees whose duties are executive, administrative, or professional. For a salaried employee to be exempt under one of these categories, the duties test associated with the particular category must be met along with compensation at least equal to the minimum threshold established by the Labor Department.

New vs. old: The compensation factor changes under the new regulations. The new annual salary threshold for the executive, administrative, or professional exemption is $684 a week, or $35,568 a year, up from $455 a week, or $23,660 a year. Under the new law, employers are able to use nondiscretionary bonuses and incentive payments, such as commissions or piece-rate wages that are paid annually or more frequently to satisfy up to 10% of the new minimum salary level. The previous law did not include such provisions.

The new rules add an option that allows an employer to make a catch-up payment within one pay period after the end of each 52-week period to bring an employee’s compensation up to the required level to qualify for the exemption. In that case, however, the employer must pay the employee at least 90% of the annual salary threshold for exemption (i.e., at least $615.60 per week, including

salary and 10% of permitted nondiscretionary bonuses and incentive payments) during the 52-week period. The catch-up payment counts only toward meeting the prior year’s salary exemption threshold and not toward meeting the threshold for the year in which the catch-up payment is actually made.

Additional Background on Available Exemptions

Decision time: An employer with an employee who has a weekly salary of $455 to $684 has to decide to:

• change the employee’s status to nonexempt,

• start tracking time and pay overtime for all hours thatexceed 40 in a workweek, or

• give the employee a raise to bring the salary to $684 a week.

Salary alone is not enough: Salaried employees earning less than the minimum annual salary threshold are generally eligible for overtime pay. However, the fact that an employee is salaried and earns more than the minimum threshold does not necessarily mean that the employee is exempt from overtime pay. The employee’s job duties must consist of executive, administrative, or professional duties as defined in the regulations.

The new rule does not affect existing definitions for executive, administrative, or professional duties. The exemptions apply to employees only if the following are satisfied:

• they are paid on a salary basis, also known as the salary test;

• the salary meets the minimum threshold requirement; and

• employee job duties fit within the executive,administrative, or professional classifications, also knownas the duties test.

An executive employee is one whose primary duty is managing the organization or a significant part of it, regularly directs the work of two or more other full-time employees, and has the authority to hire or fire other employees or whose input on personnel matters is given particular weight.

An administrative employee has the primary duty of performing office or other nonmanual work directly related to the organization’s operations, and exercises “discretion and independent judgment” in “significant” matters. The first prong is relatively straightforward while the second prong is more subjective and fact-specific.

White-Collar Overtime Rule

https://src.bna.com/MZA


15

The professional employee exemption is more straightforward. To qualify, the employee’s primary duty must be to perform work either requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or requiring creativity, invention, imagination, originality, or talent in a “recognized field of artistic or creative endeavor.”

Other exemption categories exist under the FLSA, including those for outside sales employees, employees in computer-related occupations, and highly compensated employees. For the highly compensated category, the new regulation increases the annual threshold to $107,432 from $100,000. The new rules include definitions for each category.

Special exemptions also exist for some ministers and religious workers, seasonal employees, and teachers; those categories are defined in the rules. No salary threshold applies to these special categories of exemption.


16

Health savings accounts, available only when qualified high-deductible health insurance plans are offered, provide a tax-favored savings mechanism to offset the costs of health care.11 Although the basic rules on HSA contributions and reporting are fairly straightforward, these rules may create some confusion at year-end in a few areas:

Form W-2 Reporting

Employers generally are required to report HSA contributions made in the year on the employee’s Form W-2, in Box 12 with Code W.

Box 12 should report all employer contributions to the HSA in the applicable year, including employee contributions through an I.R.C. Section 125 cafeteria plan and those designated as made for the prior year. Employee contributions made to an HSA outside of a Section 125 cafeteria plan are generally included in gross income and should be reported as wages on Form W-2 in Box 1. If the wrong amount is reported in Box 12, such as not counting employee contributions made through a cafeteria plan, the Form W-2 should generally be amended to provide the correct amount.

Note that some states, including California and New Jersey, do not exempt contributions to HSAs from state income tax.

11 I.R.C. Sections 106(d), 223

Maximum Annual Contributions

The tax-free limits on combined employer and employee HSA contributions are indexed for inflation.

For 2019, the limits are $3,500 for individual policies and $7,000 for family policies.

For 2020, the limits are $3,550 for individual policies and $7,100 for family policies.

Recovering HSA Contributions Made in Error

In general, employers may not recoup funds deposited into an employee’s HSA. In some cases, employers may recover contributions made in error, but action generally must be taken before the end of the year.

Employer contributions inadvertently made to employees who were never considered eligible may be recovered through a request made to a financial institution.

Employer contributions exceeding the maximum annual contributions allowed because of errors, including administrative mistakes and employee elections not processed on time, may be corrected by requesting that the funds be returned. To the extent not recovered by the end of the tax year, excess employer contributions must generally be reported as wages on the employee’s Form W-2.

Health Savings Accounts


17

Employers generally are required to impute amounts as taxable income for employer-provided group-term life (GTL) plans that exceed $50,000 in benefit value.12 Although federal income taxes need not be withheld for this income, FICA taxes generally must be withheld when the income is assigned, and these amounts are reportable on Form W-2. The cost of the additional benefit value, in addition to being added to taxable compensation on Form W-2 in Boxes 1, 3, and 5, must be reported in Box 12, using Code C. The amount included as wages is reduced by any amount paid by the employee with after-tax dollars for the insurance. These rules may be different for key employees if they are favored under the GTL plan.

While the basic calculation for employers providing GTL is not difficult, one area that often is forgotten is when employers offer employees the ability to purchase additional GTL coverage, often referred to as “optional life” or “supplemental life.” When employees pay for the entire additional coverage, sometimes the employee-purchased coverage amount should be added to the calculation for the overall valuation of GTL.

12 I.R.C. Section 79(a)

Under the I.R.C., amounts carried directly or indirectly by the employer through arranged payments, negotiated rates, and other arrangements for the coverage to be available should be included when calculating the attributed income. These amounts may be figured using IRS Uniform Table 1, which is included in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

More complexity occurs when supplemental term life insurance rates qualify under the “straddle test,” in which case that coverage should be included in the overall GTL calculation. The definition of the straddle test is when at least one employee is charged a rate lower than the IRS Uniform Table I rates and at least one employee is charged a rate higher than those in the IRS Uniform Table I.

If all age bracket rates charged to the employees are higher, or are all lower than the IRS Uniform Table I rates, the amounts generally are not considered carried by the employer. Thus, the coverage should not be included in the overall group-term life calculation.

Group-Term Life Insurance


18

In 2020, employers should prepare for changes to existing family-leave programs in some states. California plans to expand its family-leave program to eight weeks from six weeks, starting July 1, 2020.

Under New Jersey’s family-leave insurance program, benefits for a leave period that starts July 1, 2020, or later are payable for up to 12 weeks in a 12-month period, up from six weeks, or up to 56 days during a 12-month period if the leave is taken on an intermittent basis.

Several states enacted paid-leave laws that would take effect in later years, but employers can start preparing in 2020. Connecticut is to allow employees to take up to 12 weeks of benefits for family and medical leave in a 12-month period, plus two weeks of compensation for incapacitating pregnancy conditions. Employee contributions of a percentage of their earnings to the trust fund are to start January 1, 2021, while benefits are to be paid to covered employees starting January 1, 2022. A public-education campaign about the paid family and medical leave is to start January 1, 2020.

Oregon passed a paid family- and medical-leave insurance program that would be funded by mandatory contributions from employers and employees. The program is to start January 1, 2022, and benefits are to become available January 1, 2023.

Connecticut and Oregon also join Massachusetts, New York, Rhode Island, Washington, and the District of Columbia in adopting family-leave programs.

In Colorado, 2019 legislation created the Family and Medical Leave Task Force to develop recommendations about the feasibility and administration of a paid family- and medical-leave insurance program. Recommendations are expected by January 2020.

Nevada’s paid-leave requirements take effect January 1, 2020. Employers in the state with at least 50 employees must provide a minimum of 0.01923 hours of paid leave for each hour worked starting 90 days after employment starts.

Although no action has occurred on the federal level regarding the proposal by President Donald Trump to provide paid time off for new parents, several states and localities have requirements in place for employers to provide paid leave to employees.

Employers that have existing paid-leave programs should ensure those policies meet or exceed any accrual requirements for these jurisdictions.

For localities, California has six jurisdictions requiring employers to provide paid leave in 2019. Other states with these local requirements are Illinois (Chicago and Cook County), Maryland (Montgomery County), Minnesota (Duluth, Minneapolis, and St. Paul), New Mexico (Bernalillo County), New York (New York City and Westchester County), Oregon (Portland), Pennsylvania (Philadelphia and Pittsburgh), Texas (Austin, Dallas, and San Antonio), and Washington (Seattle and Tacoma).

Major jurisdictions with paid-leave requirements in 2020: Arizona, California, Connecticut, Georgia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, Oregon, Puerto Rico, Rhode Island, Vermont, Washington, and the District of Columbia.

Alaska Hawaii D.C. Puerto Rico

Local requirements: California, Illinois, Maryland, Minnesota, New Mexico, New York, Oregon, Pennsylvania, Texas, and Washington.

State and Local Paid Leave


19

Federal Limits

2019 2020Social Security (OASDI) Wage Base $132,900 $137,700

Basic Deferral Limits

Sec. 401(k), 403(b) $19,000 $19,500

Catch-Up $6,000 $6,500

SIMPLE $13,000 $13,500

Sec. 457 $19,000 $19,500

Defined Contribution Max. Annual Addition $56,000 $57,000

Defined-Benefit Plan Limits $225,000 $230,000

Compensation Limits, Credits, and Triggers

Qualified Plans $280,000 $285,000

Highly Compensated Employee $125,000 $130,000

Compensation Limit $415,000 $425,000

Dollar Limit for Key Employee (Top-Heavy Plan) $180,000 $185,000

Compensation Amount for Control Employee $110,000 $115,000

Foreign-Earned Income Exclusion Limit $105,900 $107,600

Adoption Assistance $14,080 $14,300

Per Diem Rates

Standard $149 $151

High-Low Method $287, $195 $297, $200

Health Plan Limits

Health Flexible Spending Arrangements $2,700 $2,750

Health Savings Account Contributions—Single $3,500 $3,550

Health Savings Account Contributions—Family $7,000 $7,100

Federal Vehicle Valuations

Mileage Rates (Per Mile)

Business 58 cents TBD

Charitable 14 cents TBD

Medical 20 cents TBD

Luxury Car Definition

(Ineligible for Cents-Per-Mile Use Valuation)

Fair Market Value Greater Than Listed for Employer-Provided $50,000+ (car) TBD

Vehicles First Made Available in 2018 and 2019 $50,000+ (truck) TBD

Tax-Free Transportation Benefits (Monthly) $265 $270

Fleet Average Maximum Value

Fair Market Value (Before Averaging) Cars at least $50,000 TBD

Fair Market Value (Before Averaging) Trucks at least $50,000 TBD

By The Numbers


20

2020 Hourly Minimum Wage Rates

Jurisdiction Base Hourly Minimum Wage

Federal $7.25

Federal Contractor $10.80

Alabama $7.25

Alaska $10.19

Arizona $12

Arkansas $10

California $13, $12 ‡

Colorado $12

Connecticut $11/$12 *

Delaware $9.25

District of Columbia $14/$15 *

Florida $8.56

Georgia $5.15

Hawaii $10.10

Idaho $7.25

Illinois $9.25

Indiana $7.25

Iowa $7.25

Kansas $7.25

Kentucky $7.25

Louisiana $7.25

Maine $12

Maryland $11

Massachusetts $12.75

Michigan $9.65

Minnesota $10, $8.15 ‡

Mississippi $7.25

Jurisdiction Base Hourly Minimum WageMissouri $9.45

Montana $8.65 **

Nebraska $9

Nevada $9, $8 ‡ *

New Hampshire $7.25

New Jersey $11, $10.30 ‡

New Mexico $9

New York $15-$11.80 ‡

North Carolina $7.25

North Dakota $7.25

Ohio $8.70 **

Oklahoma $7.25 **

Oregon $13.25-$11.50 ‡ *

Pennsylvania $7.25

Puerto Rico $7.25 **

Rhode Island $10.50

South Carolina $7.25

South Dakota $9.30

Tennessee $7.25

Texas $7.25

Utah $7.25

Vermont $10.96

Virginia $7.25

Washington $13.50

West Virginia $8.75

Wisconsin $7.25

Wyoming $5.15

By The Numbers

‡ varies by employer size, location, benefits provided * subject to change ** exceptions apply


21

Unemployment Insurance Wage Bases

State 2019 2020

Alabama 8,000 8,000

Alaska 39,900 *

Arizona 7,000 7,000

Arkansas 10,000 7,000

California 7,000 7,000

Colorado 13,100 13,600

Connecticut 15,000 15,000

Delaware 16,500 16,500

District of Columbia 9,000 9,000

Florida 7,000 7,000

Georgia 9,500 9,500

Hawaii 46,800 *

Idaho 40,000 *

Illinois 12,960 *

Indiana 9,500 9,500

Iowa 30,600 31,600

Kansas 14,000 14,000

Kentucky 10,500 10,800

Louisiana 7,700 *

Maine 12,000 12,000

Maryland 8,500 8,500

Massachusetts 15,000 15,000

Michigan 9,000; 9,50013 *

Minnesota 34,000 *

Mississippi 14,000 14,000

Missouri 12,000 11,500

Montana 33,000 34,100

State 2019 2020

Nebraska 9,0009,000;

24,00014

Nevada 31,200 32,500

New Hampshire 14,000 14,000

New Jersey 34,400 35,300

New Mexico 24,800 25,800

New York 11,400 11,600

North Carolina 24,300 25,200

North Dakota 36,400 *

Ohio 9,500 9,000

Oklahoma 18,100 18,700

Oregon 40,600 42,100

Pennsylvania 10,000 10,000

Puerto Rico 7,000 *

Rhode Island 23,600; 25,10014 *

South Carolina 14,000 14,000

South Dakota 15,000 15,000

Tennessee 7,000 *

Texas 9,000 9,000

Utah 35,300 *

Vermont 15,600 16,100

Virginia 8,000 8,000

Washington 49,800 52,700

West Virginia 12,000 12,000

Wisconsin 14,000 14,000

Wyoming 25,400 26,400

13 For each year when Michigan’s unemployment trust fund balance was sufficiently high during the previous year, Michigan employers not delinquent in paying unemployment-related amounts are assigned a reduced taxable wage base.

14 Experienced Nebraska and Rhode Island employers that are assessed the maximum unemployment tax rate are assigned a higher wage base.

Changes for 2020 are in bold. Wage bases that decreased are in bold italic. * wage bases to be announced

By The Numbers

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