On March 31, the IRS released multiple pieces of guidance regarding provisions of the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus, Aid, Relief, and Economic Stability (“CARES”) Act. The FFCRA includes two employer social security tax credits for employers of 500 or fewer employees equal to the amount of paid leave that the employer is required to provide to employees related to the COVID-19 pandemic. (See earlier coverage.) The CARES Act provides a credit against employer social security tax equal to 50% of qualified wages paid to employees after March 12, 2020, and before December 31, 2020.
On March 20, the IRS issued a news release providing details of how the FFCRA credits will be administered. (See earlier coverage.) On March 31, the IRS released IR 2020-62 providing guidance on the availability of the employee retention credit in the CARES Act, Notice 2020-22 providing relief from late deposit penalties for employment tax deposits reduced in anticipation of one of the employer social security tax credits, and new IRS Form 7200 (and form instructions) for claiming a refund of excess social security tax credits. Below, we discuss the employee retention credit and the guidance released yesterday.
Employee Retention Credit
Section 2301 of the CARES Act provides an employee retention credit to eligible private employers equal to 50 percent of qualified wages. This credit applies to the employer portion of social security taxes (but not Medicare taxes) or, if applicable, taxes owed with respect to Tier 1 railroad retirement benefits, and determined by reference to wages (as defined in Section 3121(a)) paid after March 12, 2020, and before January 1, 2021.
The amount of qualified wages which may be taken into account with respect to the credit is limited to $10,000 total for each employee for all calendar quarters. If this credit exceeds applicable employment taxes, the excess will be refunded to the employer, and employers are permitted to reduce their employment tax deposits in anticipation of the credit.
To take advantage of the employee retention credit, the employer must be one carrying on a trade or business during calendar year 2020, the operation of which is fully or partially suspended under orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. This requirement applies to organizations exempt from tax under Section 501(c). An employer may also claim the employee retention credit if the employer experiences a significant decline in gross receipts in any calendar quarter beginning after December 31, 2019, meaning that gross receipts are less than 50 percent of gross receipts in the same calendar quarter in the prior year. This period ends with the calendar quarter following the first calendar quarter in which gross receipts exceed 80 percent of the same calendar quarter in the prior year.
In calculating qualified wages for purposes of determining the amount of the employee retention credit, employers with more than 100 full-time (within the meaning of Section 4980H) employees should take into account wages paid by the employer with respect to which an employee is not providing services as a result of COVID-19 or due to a significant decline in the gross receipts of the employer. For employers with 100 or fewer full-time employees, qualified wages include all wages paid, even if the employee provides services during this period. Applicable wages include the amount of qualified health plan expenses allocable to wages otherwise eligible for the credit. However, amounts paid for required sick leave and FMLA leave under the Families First Coronavirus Response Act (“FFCRA”) for which the employer received an FFCRA credit for employer social security tax cannot be taken into account.
Any employer that receives a small business interruption loan, as set forth in Section 1102 of the CARES Act, is not eligible for the employee retention credit. Further, governmental entities, including the federal government and the government of any state or political subdivision thereof may not take advantage of the employee retention credit.
Administration of Social Security Tax Credits
In Notice 2020-22, released on Tuesday, the IRS confirmed the approach it announced in IR 2020-57 with respect to all three of the employer social security tax credits. Accordingly, employers may reduce all federal payroll tax deposits in anticipation of either of the FFCRA credits and/or the employee retention credit. These changes will necessitate significant revisions to the Form 941. Because of those changes, the IRS has announced that employee retention credits relating to qualified wages paid before April 1, 2020, can be claimed on the second quarter Form 941.
Under the Notice, the IRS will not assert a late deposit penalty against an employer with respect to employment taxes on paid leave required to be provided pursuant to FFCRA provided that the employer made required leave payments to its employees in the quarter prior to the date on which the employment taxes were required to be deposited and the amount of employment taxes that were not timely deposited was no more than the amount of the employers anticipated FFCRA credits at the time of the required deposit, and the employer did not file IRS Form 7200 requesting an advance credit with respect to the anticipated credits it relied upon to reduce its deposits (see discussion below). The maximum amount by which an employer may reduce any deposit of employment taxes is the sum of (a) the amount of required paid leave, (b) allocable health plan expenses, and (c) the employer’s share of Medicare tax on the required leave payments in the calendar quarter, reduced by the sum of such items previously used to reduce an earlier required deposit in the quarter or (2) to seek payment of an advance credit on Form 7200.
Similarly, the IRS will not assert a late deposit penalty against an employer with respect to employment taxes on provided that the employer made qualified wage payments to its employees in the quarter prior to the date on which the employment taxes were required to be deposited and the amount of employment taxes that were not timely deposited (reduced by the amount of employment taxes not deposited in anticipation of the FFCRA credits) was no more than the amount of the employers anticipated employee retention credit at the time of the required deposit, and the employer did not file IRS Form 7200 requesting an advance credit with respect to the anticipated employee retention credit it relied upon to reduce its deposits (see discussion below). The maximum amount by which an employer may reduce any deposit of employment taxes is 50% of qualified wages paid in the calendar quarter before the required deposit, reduced by 50% of the qualified wages previously used to reduce an earlier required deposit in the quarter or (2) to seek payment of an advance credit on Form 7200.
Unfortunately, the notice did not specifically address the interaction between the employer social security tax deferral in section 2302 of the CARES Act with the employer social security tax credits. (See earlier coverage.) By allowing employers to claim the credit against other taxes while deferring employer social security tax deposits, it appears that the IRS will allow the employer to take advantage of the credits now and pay the full amount of employer social security tax in 2021 and 2022. This approach seems consistent with the purpose behind the credits—namely, providing ready cash to employers to encourage them to pay employees they might otherwise be unable to pay–but is not entirely consistent with the statutory language.
Form 7200 (Advance Payment of Employer Credits Due to COVID-19)
Tuesday, the IRS released new IRS Form 7200 (along with instructions) that will be used by employers to claim a refund of excess employer social security tax credits. Form 7200 is designed to tell the IRS what portion of the claimed credits must be paid directly to the employer because the employer cannot obtain those credits through the reduction of employment taxes required to be deposited through the date of the Form 7200 filing. An employer may file Form 7200 anytime that it is eligible for an advance payment of the employer social security tax credits. Alternatively, it may wait and claim the credit on its quarterly Form 941. An employer should not file a Form 7200 to claim a credit for any tax credits which it retained by reducing the amount of its employment tax deposits.
In Part II of Form 7200, the employer reports, for the calendar quarter-to-date, the employee retention credit and the qualified sick leave and family leave wages (plus certain related health plan expenses and the employer’s share of the Medicare taxes on the qualified leave wages) that are eligible for the credits. The employer also reports the amount of the employment taxes (i.e., withheld federal income tax, the employee share of social security and Medicare taxes, and the employer share of social security and Medicare taxes with respect to all employees) that it retained for the quarter-to-date rather than depositing them. If the calculation in Part II confirms that there were insufficient employment taxes to cover the cost of qualified sick and family leave wages (plus the qualified health expenses and the employer share of Medicare tax on the qualified leave wages) and the employee retention credit, Form 7200 calculates the excess as the advance payment to which the employer is entitled.
Wages Paid by Third Parties
The Form 7200 instructions confirm that the credits belong to the common-law employer of the individuals that are paid qualified sick or family leave, or wages qualifying for the employee retention credit, regardless of whether the employer uses a third-party payer (such as a payroll service provider, professional employer organization (PEO), certified professional employer organization (CPEO), or Section 3504 Agent) to report and pay the employer’s federal employment taxes. In other words, the third-party payer is not entitled to the credits on wages that it remits on the common law employer’s behalf. It is important, however, that the common law employer provide its third-party payor with copies of any Forms 7200 that it files on its own behalf, so that the credits can be reconciled on the aggregate employment tax return. The instructions provide specific details of how reconciliation must be accomplished.