COVID-19/Coronavirus, Employment Law

COVID-19 FAQ: Compensation and Tax Issues

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Last updated April 10, 2020.

This general guidance is based on U.S. federal employment law and the current medical assessment of COVID-19. State and local laws may apply, and medical assessments may change, resulting in different conclusions.

Compensation and Tax Issues

  • Answer1. If a furlough meets the definition of a payment triggering event under a deferred compensation arrangement (e.g., “separation from service” under the Internal Revenue Code Section 409A rules), it would trigger a deferred compensation payout.

  • A2. Employers should carefully consider any tax implications of accelerating any payments of deferred compensation or changing the time or form of payment of deferred compensation. Those types of changes can trigger adverse tax consequences under Internal Revenue Code Section 409A.

  • A3. It is possible that the events surrounding COVID-19 may impact an employer’s ongoing business in such a way to trigger payments under employment agreements, executive compensation arrangements, and/or severance agreements. Employers should carefully review these agreements and consider the potential for these impacts and address these issues with counsel.

  • A4. For employees who normally live in one state and work in another and who begin telecommuting, the employer will need to coordinate with its payroll provider to determine whether to change the income tax withholding to the state where the employee performs the services. Employers should consult a payroll tax advisor on these issues as some states are waiving this requirement for residents of the state who normally work in another state but who are working in the state as a result of the COVID-19 crisis.

  • A5. Employers that receive loans or loan guarantees under Title IV of the CARES Act are subject to limits on compensation that can be paid to executives and other high earners while the loan is outstanding and for a period of time after the loan is paid off.

  • A6. Employers are entitled to take payroll tax credits for mandatory paid leave payments made under the FFCRA for leave taken under the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act (EFMLEA) for the period from April 1, 2020, through and including December 31, 2020. Each quarter, employers are entitled to a refundable tax credit equal to 100 percent of the qualified leave wages paid under the EPSLA and the EFMLEA to eligible employees, plus qualified health plan expenses allocable to those wages and the employer’s share of the Medicare tax on those wages. Employers are not subject to the employer portion of Social Security tax on the EFMLEA and EPSLA wages. See response to question 5 in the Health Coverage FAQs.

  • A7. Under the CARES Act, employers are required to a refundable credit against the employer component of employment tax (Social Security and Railroad Retirement), equal to a maximum of 50 percent of qualified wages paid after March 12, 2020, through December 31, 2020. The credit is in addition to the tax credit available under the FFCRA, but may not be claimed on the same wages. While the tax credit under the FFCRA relates to wages (and related health care costs) for employees on mandatory paid leave due to COVID-19, the tax credit under the CARES Act relates to wages (and related health care costs) paid to employees when the employer has fully or partially suspended its business operations, or has had a significant decline in its gross receipts, due to the COVIC-19 pandemic. For employers with over 100 employees, the credit may be claimed only for those employees who are unable to provide services due to the employer’s suspension of operations or decline in gross receipts. The cap on this credit is $5,000 per employee. Please see our recent blog post.

 

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