Late Wednesday, 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.  This is the second in a series of articles that will address various aspects of the FAQs.  This article addresses employer eligibility for the credit based on a significant decline in gross receipts.  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.  Subsequent articles will address the determination of qualified wages and allocable qualified health plan expenses, issues related to the income and deduction treatment of qualified wages for employees and employers, and issues related to the use of third-party payers.  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. Continue Reading IRS FAQs on Retention Credit Provides Guidance on “Significant Decline in Gross Receipts”

Late Wednesday, 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.  Covington continues to analyze the guidance, but employers who have made use of the employee retention credit—which took effect over a month ago with respect to wages paid as many as six weeks ago—should review the FAQs to determine how the guidance may affect their determination of eligibility for the credit and the calculation of the credit amount.  Unfortunately, several of the answers take a narrower approach to interpreting the law than is necessary and seem somewhat divorced from the economic reality that is effecting many employers—particularly large employers—given the COVID-19 pandemic.  Employers who have relied on reasonable, good faith determinations of their credit eligibility so that they could afford to keep workers on the payroll may now be put in an even more precarious financial position by FAQs that suggest the credit is not available to them generally or is not available with respect to some workers.

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.  This is the first in a series of articles that will address various aspects of the FAQs.  This article focuses on 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.  Later articles will address employer eligibility based on a significant decline in gross receipts, the determination of qualified wages and allocable qualified health plan expenses, and issues related to the income and deduction treatment of qualified wages for employees and employers.  In an earlier article, we addressed how employers can claim the employee retention credit and its interaction with the deferral of employer social security tax deposits.

Continue Reading IRS FAQs on Retention Credit Highlight Aggregation Concerns and Narrow Potential Eligibility

Employers electing to defer the deposit of the employer share of Social Security taxes on wages, as permitted under section 2302 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, are challenged with how to take the deferral in conjunction with the COVID-19 payroll tax credits—the employee retention credit authorized by section 2301 of the CARES Act and, if applicable, the two payroll tax credits applicable to employers employers of 500 or fewer employees that are required to provide paid leave under the Families First Coronavirus Relief Act (“FFCRA”).

The benefit of electing to defer the deposit of the employer share of Social Security taxes or claiming payroll tax credits may be realized in real time when the employer runs its payroll providing a near-immediate cash injection into the employer’s business to help defray the cost of employee wages.  In other words, the employer does not have to wait to enjoy the benefit until it files its quarterly employment tax return (Form 941).  The IRS is in the process of revising that return so that the reporting of the deferral and credits are reconciled with the payroll taxes (e.g., employer share of FICA taxes, the employee share of FICA taxes and federal income tax withholding) paid and withheld on payments made to employees during the calendar quarter. Continue Reading A Primer for Employers: How to Stack the Employer Social Security Tax Deferral with the COVID-19 Payroll Tax Credits

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. Continue Reading IRS Releases Guidance on Coronavirus-Related Payroll Tax Credits

After months of gridlock, the House and Senate, on December 21, both passed another round of COVID relief legislation (H.R. 133).  The 5,593-page bill, which gained momentum following the introduction of bipartisan compromise legislation, provides an enhanced employee retention credit (“ERC”), which is easier for employers to qualify during the first six months of 2021, as compared to the ERC enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

The bill also includes extensions to a number of workforce-related tax credits, including the work opportunity tax credit (“WOTC”), the paid family and medical leave tax credit included in the Tax Cuts and Jobs Act as a two-year pilot program, and the paid leave credits enacted as part of the Families First Coronavirus Response Act (“FFCRA”).  The bill would also extend the period during which employers may make student loan payments or reimbursements under an Internal Revenue Code Section 127 educational assistance plan, permit employers to provide additional flexibility under flexible spending accounts, and provide employers with a longer period in which to collect employee Social Security tax which was deferred during 2020 under IRS Notice 2020-65.

The bill would also add an employer income tax credit for qualified wages paid to employees in qualified disaster areas in 2020 for disasters other than COVID-19.  Finally, the bill addresses the deductibility of expenses paid with forgiven PPP loans. Continue Reading Fourth (and Final?) COVID Relief Measure Clears House and Senate

On July 30, 2020, the IRS released guidance in the form of new frequently asked questions (“FAQs”)  addressing the deferral of the employer portion of Social Security taxes under section 2302 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  These FAQs are broad in nature, providing guidance on various considerations relevant to section 2302 of the CARES Act, including application of these rules to first calendar quarter deposits, coordination with the next-day deposit rule, and considerations for employers that use third parties to report and deposit employment taxes with the Treasury.  Covington continues to review this guidance, and has summarized in this blog post some of the provisions we consider most relevant to employers.

When reviewing this latest guidance from the IRS, employers should be mindful that although they represent the current thinking of the IRS regarding section 2302, these FAQs are  non-binding; the IRS is under no obligation to comply with these FAQs and could therefore take a different approach at any time.  As we have noted previously, the IRS has changed course with respect to FAQs issued in connection with other provisions in the CARES Act, such as the employee retention credit. Continue Reading IRS Releases Additional FAQs on Deferral of Employment Tax Deposits Under Section 2302 of the CARES Act

On July 27, Senate Republicans introduced a series of bills intended as their opening salvo in what appears likely to be contentious negotiations among Senate Republicans, the White House, and House and Senate Democrats over the next legislative response to the COVID-19 pandemic.  Along with another round of direct stimulus payments to individual taxpayers, extended unemployment benefits, and enhancements to the employee retention credit (earlier coverage) enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, one proposed bill, the American Workers, Families, and Employers Assistance Act (the “Bill”), would expand the Work Opportunity Tax Credit (“WOTC”)  in an effort to spur employers to hire and rehire workers.

Under Section 51 of the Internal Revenue Code, the WOTC is a tax credit for employers who hire individuals belonging to one or more targeted groups.  Section 212 of the Bill would add a new WOTC targeted group for “COVID-19 unemployment recipients.”  The group encompasses individuals who have received (or are approved to receive) unemployment benefits for the week of or the week immediately preceding the hiring date.  Individuals may qualify as COVID-19 unemployment recipients regardless of whether their job loss resulted from the pandemic or predated it, so long as they remain eligible for unemployment benefits immediately before being hired.  For the employer to receive the credit, an employee would have to begin work between the date of enactment and January 1, 2021, potentially spurring a round of hiring late in 2020.

The WOTC is usually equal to 40% of “first-year wages,” subject to caps that vary among the different targeted groups.  For the COVID-19 targeted group, the Bill would increase the amount of the credit to 50% and apply a cap of $10,000 on first year wages, resulting in a maximum credit of $5,000 per hired or rehired employee.  (Generally, employers are prohibited for claiming the credit with respect to rehired employees, but the Bill would eliminate the restriction on rehires with respect to COVID-19 unemployment recipients.  The Bill also directs the Treasury Department to issue regulations to prevent abuse, such as terminating and rehiring employees to obtain the credit.)  Wages used in calculating the employee retention credit may not be included in the determination of the WOTC credit.

It is uncertain whether the proposed WOTC expansion will make it into any final COVID-19 package, but we will continue to monitor developments.

UPDATE: President Trump signed the bill into law on Friday afternoon.

Earlier this afternoon, the House passed by voice vote the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the third Coronavirus-related piece of legislation, which was passed by the Senate on Wednesday with a 96-0 vote.  At $2 trillion, the CARES Act is the largest stimulus package in U.S. history and is headed to the White House for President Trump’s signature later today.

In our previous article, we provided a Client Alert summarizing the tax-related provisions in the CARES Act.  Our next two articles will highlight two provisions available to qualifying employers as they navigate this challenging time.  Today, we focus on Section 2302, which permits employers to defer deposits of the employer share of social security taxes. Given that it is a near certainty that the President will sign the Act before Monday, employers may seek to cancel payroll tax deposits initiated for wages paid today and initiate a same-day wire transfer deposit on Monday of the payroll deposits less employer social security tax. The deferral provision applies only to the employer’s share of social security tax.  It does not apply to the employer’s Medicare taxes nor to the employee’s share of social security or Medicare taxes. Continue Reading CARES Act Enacted; Employers May Defer Some Payroll Tax Deposits Due on Monday

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