Employees are essential to most businesses. Finding and retaining good employees can be challenging, especially during tough times such as the pandemic. The government continually changes rules impact you and your employees.
Employee Rules for 2021
Here are some new rules to note for 2021.
1. DOL final rule
One of the key challenges for many employers is to classify workers properly—as employees or independent contractors. Different rules apply for different government purposes. The U.S. Department of Labor recently issued a final rule to help you determine whether workers are economically dependent on your business, and thus employees, or in business for themselves, and thus independent contractors. If they’re not independent contractors, then minimum wage and overtime rules apply to nonexempt employees (employees who are not managers or others exempt from minimum wage and overtime rules).
Again, keep in mind that different standards apply for different purposes. For example, for federal employment taxes, IRS guidance controls. There have been no changes in these rules, although there have been proposals in Congress to do so.
2. Voluntary extension of paid sick leave and family leave
In 2020, small employers were required to provide certain paid sick leave and paid family leave for employees directly impacted by COVID-19. The cost of these benefits did not come out of employers’ pockets; it was funded through employment taxes that employers didn’t have to pay to the government.
For January 1, 2021, through March 31, 2021, employers may continue to provide these benefits. They are not required to do so. The rules for determining which employees qualify for benefits have not changed.
The IRS has guidance on employee eligibility for these benefits and how employers claim refundable employment tax credits.
3. Employee retention credit
The CARES Act had created an employment tax credit of 50% of up to $10,000 of wages per employee between March 13, 2020, and December 31, 2020, for a maximum credit in 2020 of $5,000. The Consolidated Appropriations Act, 2021, created a new and improved employee retention credit for wages paid through June 30, 2021.
The new credit, which can be claimed whether or not employees provide services, is now 70% of wages of up to $10,000 per employee per quarter. In effect, an employer may qualify for a credit of up to $14,000 for 2021 ($10,000 wages x 70% x 2 quarter) for each employee. There are no limits on the number of employees for whom the credit may be claimed.
To be eligible to claim the credit, an employer must have a business that’s been fully or partially suspended or had to reduce business hours due to a government order. If a business is partially suspended for only part of a quarter, then only wages during that part of the quarter can be taken into account. Merely shifting employees to remote work doesn’t make the business an eligible employer.
Alternatively, a business may be eligible if there is significant drop in gross receipts. For the 2020 credit, this meant gross receipts in a calendar quarter were below 50% compared with the same calendar quarter in 2019. For 2021, only a 20% drop is necessary for a business to be an eligible employer. For new employers (not in business in 2019), the comparison is made with the quarter in which the business started.
4. Withholding for employees’ deferred Social Security tax
If you opted to defer the employees’ share of Social Security tax (part of FICA) on wages up to a set limit from September 1, 2020, through December 31, 2020, you must take appropriate action in 2021. This means withholding and depositing sufficient sums to recoup the deferred amount by December 31, 2021. If you don’t, you as the employer are liable for interest, penalties, and additions to tax that begin to accrue on January 1, 2022. The IRS has guidance on what you need to do.
5. Work opportunity credit
If your business is recovering and you’re bringing on new employees, don’t overlook the work opportunity credit. This income tax credit is for hiring people who fit into certain targeted groups, such as ex-felons and long-time family assistance recipients. The credit also applies for long-term unemployed (those out of work for at least 26 consecutive weeks). The amount of the credit varies with the targeted group (see instructions to Form 5884).
The credit was supposed to expire at the end of 2020 but has been extended through 2025. Keep this credit in mind as the economy continues to improve in the years ahead.
Caution: You and your new employee must complete IRS Form 8850 so you can submit it to your state workforce agency within 28 days after an eligible employee begins work with your business. This is to verify that the employee actually belongs to a targeted group.
New rules for employees may impact payroll costs. Be sure to discuss your situation with your CPA or other tax adviser to take advantage of rules that help your staffing while lowering your payroll costs.