Tax credits may be available to employers who are required to pay additional wages to employees under the Families First Coronavirus Response Act (the “FFCRA”). Specifically, tax credits may be available to employers who are required to pay employees under the Emergency Sick Pay Leave and the Emergency Family and Medical Leave portions of the FFCRA (the “Leave Acts”).
In addition, the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) may provide an employer with an “Employee Retention Tax Credit” for wages to paid to active or furloughed employees, in certain circumstances where either (a) the business cannot operate due to a government order, or (b) gross receipts from business have declined by more than 50%. Generally, the Retention Credit is equal to 50% of the qualified wages paid to an employee, with the maximum allowable credit being $5,000 per employee.
The IRS recently issued IRS Notice 2020-22 and IRS Form 7200 to permit, not require, an employer to immediately take advantage of the available Leave Act Credits and Retention Credits, instead of waiting until the end of the quarter.
Under this new IRS guidance, an employer may elect to use all available Leave Credits and Retention Credits as an offset to any type of required “Employment Tax Deposit” for the quarter. Thus, “Employment Tax Deposits” that may be offset with credits may include all of the following (i) federal income taxes withheld from employee pay, (ii) employee OASDI and Medicare taxes withheld from employee pay, and (iii) employer OASDI and Medicare taxes due based on employee pay. IRS Notice 2020-22 also provides that the IRS will not impose any penalties for failure to deposit taxes on time.
In addition, if an employer has a tax deposit due date where the available Leave Credits and Retention Credits are more than the required deposit of employment taxes, if the employer does elect to offset the entire deposit with available credits, the employer can file Form 7200 to claim an immediate refund of the excess credits. If credits are not claimed in advance, they can be claimed on the Form 941 filing for the calendar quarter.
We have one important word of caution for employers, especially in uncertain times like these. If an employer elects to take immediate advantage of its available Leave Credits and Retention Credits to reduce required tax deposits, the employer still has to file IRS Form 941 at the end of the quarter, and must pay all of the Employment Taxes that are not offset by the credits. Thus, an employer should be very cautious in calculating the available credits, to avoid being underpaid when the Form 941 is filed.