On April 29, the IRS released extensive new guidance in the form of frequently asked questions (“FAQs”) on the IRS website addressing various aspects of the employee retention credit. Section 2301(l) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) instructs Treasury to issue regulations concerning the application of the credit to employers that use third-party payers. This is the fifth and final article in our series addressing various aspects of the FAQs. This article addresses issues related to the use of a third-party payer, such as a reporting agent, payroll processor, section 3504 agent, or professional employer organization (“PEO”).
In our first article, we discussed the IRS’s interpretation of the aggregation rules under section 2301(d) of the CARES Act and the determination of employer eligibility based on a full or partial suspension of operations due to a government order. Our second article addressed employer eligibility for the credit based on a significant decline in gross receipts, and our third article addressed the calculation of qualified wages and allocable qualified health plan expenses. The fourth article in the series addressed income and deduction issues related to the credit. Before the release of the IRS FAQs, we addressed how employers can claim the employee retention credit and its interaction with the deferral of employer social security tax deposits (see earlier article).
Employers should carefully consider the FAQs, but remain mindful that although they represent the current thinking of the IRS, the FAQs are not binding guidance.
In Q&A-87, the IRS specifies that an employer is entitled to the employee retention credit regardless of whether it uses a third party payer (such as a reporting agent, payroll service provider, PEO, certified PEO, or agent) to report and pay its federal employment taxes. Q&A-87 provides detailed rules for claiming and reporting the employee retention credit depending on the type of third party payer the employer uses. Generally, the FAQ provides that a reporting agent is required to reflect the employee retention credit on any Form 941 (Employer’s Quarterly Federal Tax Return) that it files on the employer’s behalf, subject to specific additional requirements for certain types of third party payers.
Q&A-88 confirms that a third party payer may sign and submit Form 7200 (Advance Payment of Employer Credits Due to COVID-19) on behalf of an employer/client for which it has the authority to sign and file a tax return. The FAQ summarizes the documentation requirements with which an authorized third party payer must comply.
Q&As 89-91 relate to information that a third party payer must obtain from its client employer to claim the credit, and whether such payer may rely on client employer information regarding the credit. In general, a third party payer must obtain any information necessary to “accurately” claim the credit on its clients’ behalf, including whether the client has received a Paycheck Protection Program (PPP) loan under the CARES Act, but may rely on any information provided by the client employer, subject to the IRS’s right to request records that substantiate the client’s eligibility for the employee retention credit. Q&A-91 states that if a third party payer is claiming the credit on behalf of an employer, it must be able to obtain substantiating records from the client upon the IRS’s request.
Q&A-92 confirms that a client employer – as well as the third party payer – is responsible for avoiding a “double benefit” in which the employer claims both the employee retention credit and the credit for paid family and medical leave available under section 45S of the Code. The FAQ specifies that the client employer and the third party payer are liability for employment taxes due in connection with any employee retention credits that are improperly claimed.
Finally, Q&As 93-94 relate to an employer’s election to forgo the employee retention credit. In general, any employer may forgo the credit by not claiming it in the employer’s employment tax return, but is not prohibited from claim the credit in a subsequent quarter, provided it meets the requirements to claim the credit. In addition, an employer who forewent a credit to which it would have been entitled in a prior quarter may file a claim for a refund, using Form 941-X, to adjust its tax liability for that prior quarter. Q&A-94 specifies that because of particular issues relating to wage reporting for the first quarter of 2020, employers should not file Form 941-X to make an adjustment for wages paid in the first quarter of 2020. Otherwise, an employer should use a Form 941-X to adjust its wages paid for a prior quarter.