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The IRS released tax reporting guidelines this week for employers and individuals who have received federal COVID-19 relief payments dispersed by state and local governments.

Under the IRS guidance posted online Wednesday, (FS-2021-16), grants paid to employees and some other payments using Coronavirus State and Local Fiscal Recovery Funds (SLRF) must be included in 2021 taxable income.

For example, employers who received SLRF money to pay newly hired employees a cash bonus are required to withhold income and other employment taxes (Social Security and Medicare) from those payments, the IRS said. Cash bonuses typically are supplemental wages for purposes of federal income tax withholding.

Similarly, premium pay, which certain employees were paid for working during the pandemic, is also subject to tax withholding. Employees are required to report premium pay they received as part of their gross income, regardless of whether the money came from their employer or their state or local governments.

Unemployed workers who received one-time cash bonuses to go back to work must also include that money as part of their gross income, the IRS said.

“Even though the payment is made in connection with discontinuing your unemployment benefits, the payment is not unemployment compensation. Rather, the payment is taxable as compensation income,” the IRS FAQ states.

To read the entire FAQ, go here.