IRS Releases FAQs on Coronavirus State and Local Fiscal Recovery Funds (SLFR Funds)

The Internal Revenue Service (IRS) recently released a set of frequently asked questions (FAQs) regarding the tax consequences for recipients of Coronavirus State and Local Fiscal Recovery Funds (SLFR Funds). The FAQs also address employers’ reporting requirements pertaining to SLFR Funds. In this article, Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, covers some of the highlights:

Employers and Employees Must Report Premium Pay to the IRS

The FAQs make clear that both employers and employees must report any premium pay funded with SLFR Funds to the IRS. As the IRS plainly states, “Premium pay amounts paid to employees are considered wages.” This means that employers must withhold federal income tax, social security tax and Medicare tax from wages paid with SLFR Funds, and it means employees must include premium pay in the gross income reported on their returns.

Employees must also include any premium pay received directly from a state or local government agency in their annual gross income. “If you are performing services as an employee . . . premium pay is . . . generally considered wages and is subject to withholding of applicable taxes.”

Employers and Employees Must Also Report Cash Bonuses to the IRS

Employers that received SLFR Funds to pay cash bonuses to new employees as an incentive for returning to the workforce during the COVID-19 pandemic must also report any cash bonus payments to the IRS. These cash bonuses also qualify as wages for federal income and employment tax purposes. The IRS advises that employers should review the procedures in Section 7 of Publication 15 to determine the amount of withholding that is required.

Since cash bonuses qualify as wages, they constitute gross income for newly-hired employees. “Regardless of whether it is paid. . . by [a] state/local government, or by [an] employer, payment of a cash bonus to new employees is in the nature of compensation for services and thus is . . . subject to withholding of applicable taxes.”

Direct Payments for Childcare Costs and Utilities from SLFR Funds are Not Taxable

While premium pay and cash bonuses are considered wages for federal income tax purposes, direct payments from SLFR Funds intended to assist with childcare costs and utilities are not. “These payments are made by a state/local government and are intended to pay for family expenses resulting from the COVID-19 pandemic. . . . As such, they are considered qualified disaster relief payments . . . and are excluded from gross income.” However, families cannot claim deductions or credits for childcare expenses paid with SLFR funds, and doing so improperly can lead to civil or criminal penalties for tax fraud.

Request a Confidential Consultation with Washington D.C. Tax Lawyer Kevin E. Thorn

If you have questions or concerns about your federal income or employment tax liability for the 2021 tax year, Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, can help. To request a confidential consultation, please call 202-349-4033, email ket@thornlawgroup.com or inquire online today.