Even in exceptional times, we have to pay tax. But filing returns could be very different for 2020 earnings.
Not least because the business landscape has totally changed and many taxpayers’ incomes have been slashed, but also because these same taxpayers could have an unexpected tax liability.
Read this article to learn about tax implications resulting from the use of coronavirus (COVID-19) governments supports that could affect the finances of your employees.
Coronavirus government supports
The government responded to the coronavirus pandemic and lockdown by putting the most generous welfare payments ever in place, including the Pandemic Unemployment Payment (PUP) and the Temporary Wage Subsidy Scheme (TWSS), now replaced by the Employment Wage Subsidy Scheme (EWSS).
While they have been a lifeline for many, what numerous recipients may not have realised is that the payments are classified as gross income and are taxable – and in the case of the TWSS, also liable for the Universal Social Charge (USC).
However, if your business chooses to top-up the TWSS payment, those earnings are taxed in real time.
Marian Ryan, a tax adviser from Taxback.com, says: “The PUP and the TWSS are both deemed as taxable income. However, tax is not deducted at source.
“But many people who have received the full payment are not aware that PAYE and USC will need to be paid at the end of the year.”
Temporary Wage Subsidy Scheme tax implications
Ryan has done the sums across a range of salaries and says certain cohorts of workers will be affected more than others.
She says: “It would appear that the group that have previously been termed as ‘the squeezed middle’, with incomes of between €35,000 and €70,000, are likely to suffer a major financial blow.”
For instance, someone on a salary of €48,000, who is single and received TWSS for 23 weeks, could have a tax underpayment at the end of the year of €1,940.
This would equate to 5.4% of normal net income and would be a sizeable financial shock for a taxpayer on that level of income.
The Temporary Wage Subsidy Scheme was only available for a six-month period and finished at the end of August 2020.
But if the employee then goes on to receive the Employment Wage Subsidy Scheme, the liability will be even larger.
However, this further liability may not be as significant, because the maximum weekly subsidy under the EWSS is €203 per week, as opposed to €410 under the TWSS.
However, you can do something to mitigate your employees’ end of year tax liability.
Current advice from Revenue is to put employees on a Week 1 basis of tax (also known as non-cumulative), which will increase their tax from that date and thus lower the tax liability at the end of the year.
The final calculation of the end of year liability for each taxpayer will be dependent on a range of factors, including a person’s civil status, available tax credits, the amounts received during the year under PUP, TWSS or EWSS, and other entitlements such as health expenses.
Ryan adds: “When assessing the liability, the tax office will take into account your employees’ standard tax credits such as personal tax credit and PAYE Tax Credit but it will not know their personal circumstances, so potentially there may be some tax credits or reliefs that they are entitled to claim in order to reduce the tax bill.”
What about the Pandemic Unemployment Payment?
In general, Pandemic Unemployment Payment recipients should not be as affected.
The PUP payment will be treated in the same way as Job Seeker’s benefit, in that it will be liable to income tax at the marginal rate of 20% to 40%, but not USC.
However, if the PUP is their only source of income, they may not have any tax liability, as the liability will probably be covered by their standard tax credits – the employee and personal tax credits.
Revenue won’t be chasing immediate payment
Whatever happens, Revenue is not going to be pounding on the door of your employees looking for a payment upfront.
The tax credits of employees won’t be reduced by Revenue until 2022. Here’s how things will work.
The employee’s Preliminary End of Year Statement will be made available by Revenue in 2021.
Once the employee has completed their 2020 income tax return, the employee’s Statement of Liability will be generated by Revenue for the 2020 tax year.
When it’s due, this liability can be paid partially or in full by the employee.
If there’s any remaining unpaid liability, the balance will be collected via a reduction of the employee’s tax credits from the 2022 tax year.
Tax relief for working from home
One area of tax relief that will be particularly relevant for the 2020 tax year is working from home tax relief, which Revenue calls the eWorking tax relief.
Under this scheme, a PAYE worker has two possible options.
Pay employees to cover costs
Firstly, you can pay €3.20 a day to your employee to cover these additional costs.
This payment is tax-free and over a 12-month period could mean a significant tax saving of €768, if an employee works five days a week, for 48 weeks in the year (240 x €3.20).
However, as Ryan points out, you have no legal obligation to agree to this, and particularly now, many employers cannot afford it.
Apply for tax relief
The other option is for a PAYE employee to apply for some tax relief on the cost of utilities and other expenditures that might be incurred over their working year.
The process is arduous, with workers having to supply a letter from you confirming they are working remotely and collect all relevant utility and other bills.
However, the administration involved may not be worth it, as Revenue allows just 10% of this amount as work-related expenses.
Ryan says: “The amounts received at the end, although welcome, are not very much – perhaps on average between €20 to €60 for the year, depending on the worker’s salary and other factors.”
Final thoughts: Be tax savvy
With so many taxpayers experiencing financial worries and other stresses in 2020, an unexpected tax bill will be even less welcome for your employees than normal times.
For this reason, Ryan advises, now more than ever, it’s important for people to be mindful of their taxes and to become tax savvy, and ensure they are claiming all of their entitlements, such as medical expenses, tuition fees and eWorking relief.