Unpacking the IRS’ separate reporting rule for 2020 FFCRA wages

Form W-2 was due by February 1, 2021 despite delays in the start of this year’s tax filing season. But there's a way employers can still correct mistakes.

(Photo: Diego M. Radzinschi/THE NATIONAL LAW JOURNAL.)

At some point in 2020, most smaller businesses were legally required to provide paid time off to employees who were impacted by the Covid-19 pandemic. The Families First Coronavirus Response Act (FFCRA) created mandatory leave provisions that allowed employees to take paid time off for several different coronavirus-related reasons, including to provide care for children and family members. Now, employers are grappling with the aftermath—in terms of IRS wage reporting requirements.

Small businesses who haven’t already completed their reporting obligations should pay close attention to the reporting guidance—and those who have should confirm that 2020 FFCRA wages were reported correctly to avoid problems down the line.

FFCRA background

The FFCRA generally required all employers with fewer than 500 employees to provide paid leave to employees who had a qualifying coronavirus-related reason to take time off work in 2020. Eligible employees were entitled to up to 80 hours’ additional paid sick leave and up to 10 weeks of paid FMLA leave, depending upon the reason for the leave.

The additional paid sick leave was capped at $511 per day (for a total of $5,110) for employees unable to work or telecommute because they (1) were experiencing COVID-19 symptoms and seeking a diagnosis, (2) were subject to government-mandated quarantine or a recommendation to self-quarantine or (3) had been advised by a health care provider to self-quarantine.

The additional paid sick leave was capped at 2/3 of the employee’s pay rate, subject to a maximum of $200 per day or $2,000 total if the employee was (1) caring for someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing “substantially similar conditions”.

Reporting FFCRA wages on Form W-2

While employers were offered a tax credit for FFCRA wages paid to employees, those wages continue to constitute taxable income from the employee’s perspective. IRS guidance to date requires that any qualified wages must be reported on the employee’s Form W-2 separately in order to provide information to employees who also receive self-employment income.

Qualified sick leave wages must be included in the total wages paid to the employee (in other words, included in Boxes 1, 3 (up to the Social Security wage base) and 5 of the employee’s Form W-2).

Additionally, employers must report the wages in either Box 14 of Form W-2 or via a separate statement. The wages must be broken down by type and, regardless of how the wages are separately reported, must be labeled as either “sick leave wages subject to the $511 per day limit” or “sick leave wages subject to the $200 per day limit”.

Employers must also break out qualified family leave wages paid under the expanded FMLA provisions. In addition to being reported in Boxes 1, 3 and 5 of Form W-2, those wages must be reported in either Box 14 of Form W-2 or in a separate statement. Those wages must be labeled as “emergency family leave wages”.

If the employer opts to provide a separate statement, that statement must be provided to the employee along with the Form W-2 (whether electronically or in paper format).

The IRS has also provided model language for employers in Notice 2020-54 that employers can use to provide additional instructions to the employee. The language includes information about the types of paid leave that the employee may have received.

The model language also provides language employers can use to clarify that employees who also intend to claim any credits with respect to self-employment income must report the qualified sick leave or qualified family leave on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. Those employees are required to reduce any credits by the qualified leave wages reported by the employer.

Take the time now to address this

Form W-2 was due by February 1, 2021 despite delays in the start of this year’s tax filing season. Business owners who filed their Forms W-2 on time, but have noticed a mistake, can correct the mistake by filing Form W-2C (Corrected Wage and Tax Statement) and providing a copy of the corrected form to the employee. Because penalties are determined based on when the employer corrects the mistake, small business clients should take the time now to correct errors as quickly as possible.

Sources:

Robert Bloink, Esq., LL.M., has taught at the Texas A&M University School of Law and the Thomas Jefferson School of Law; in the past decade, Bloink has initiated $2B+ in insurance & alternative asset class portfolios, and previously served as a senior attorney in the IRS Office of Chief Counsel for the Large- and Mid-Sized Business Division. Bloink is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.

William Byrnes, Esq., LL.M., CWM, is an executive professor and associate dean of special projects at the Texas A&M University School of Law. A pioneer of online legal education, he also is the author or co-author of 20 tax books and legal treatises. Byrnes is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.

Get 10% off any Tax Facts product just for being a BenefitsPRO reader! Complete the free trial form or call 859-692-2205 to learn more or get started today. 

Recommended Stories