As described in our previous post, on December 21, 2020, another round of COVID relief legislation was passed, providing an enhanced employee retention credit (“ERC”) with various new features and greater benefit amounts.  The legislation was subsequently enacted when President Trump signed the law on December 27.  On January 26, the IRS issued a news release, containing some informal guidance on how it will operationalize this enhanced program.

Most importantly, employers can continue to reduce their employment tax deposits to access the ERC for the 1st and 2nd quarters of 2021, prior to filing their employment tax returns.  However, only small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit on a Form 7200.  So, unlike in 2020, advance payments are not available for larger employers.  This statutory change was likely intended to reduce the burden on the IRS, which has struggled to process the forms timely.  Larger employers are now further incentivized to reduce employment tax deposits as they go, because, if they do not, these employers will need to wait until they file their Forms 941 to realize the credit.

The news release also highlights the fact that employers that did not exist in 2019 may now use the corresponding quarter in 2020 to measure their declines in gross receipts (for the purpose of claiming the 2021 credits).  The IRS also plans to release further guidance describing how other employers may elect to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

Unfortunately the recent news release does not provide additional guidance on the coordination of benefits provided under the enhanced ERC and the PPP loan program—under the new law employers may now avail themselves of both programs.  While the IRS has separately provided limited guidance on its website permitting employers whose application for PPP loan forgiveness was denied to claim the credit for qualified wages paid in 2020 on the fourth quarter 2020 Form 941, that guidance was likely too late for many employer.  Those employers may instead file Forms 941-X reporting the qualified wages paid and credits due for each quarter in 2020.  Employers whose application for PPP loan forgiveness was approved or who have not yet submitted an application for forgiveness are awaiting guidance on how they should document wages used to seek PPP loan forgiveness so that they may claim the ERC for any additional wages they paid that qualify as qualified wages.  Additional guidance regarding how such employers should report qualified wages paid in earlier quarters on the Form 941 and 941-X is also needed.

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Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on withholding taxes, including state and federal employment taxes, Chapter 3, and the Foreign Account Tax Compliance Act (FATCA) and information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on withholding taxes, including state and federal employment taxes, Chapter 3, and the Foreign Account Tax Compliance Act (FATCA) and information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S.

Michael advises large employers on their employment tax compliance obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, and executive perquisites, such as the taxation of company cars, corporate aircraft (including the use of SIFL valuations), and employer-provided housing. In addition, he has worked with clients to submit voluntary corrections of employment tax mistakes and seek abatement of late deposit and information reporting penalties. Michael has extensive controversy experience representing clients in IRS examinations and before the IRS Independent Office of Appeals in employment tax, late deposit, and information reporting penalty cases.

As part of Covington’s Global Workforce Solutions practice, Michael counsels clients on all aspects of mobile workforce issues including state income tax withholding for remote workers and mobile employees. He also advises on treaty claims and various tax issues related to expatriate and inpatriates.