Locke Lord QuickStudy: IRS Guidance Regarding Waiver of Penalties and Acquiring Advance Payments for Payroll Tax Credits

On March 18, 2020 President signed the Families First Coronavirus Response Act, or the “FFCRA”, into law. On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or the “CARES Act”, into law. Both the FFCRA and the CARES Act provide employers certain tax credits against employment taxes. On March 31, 2020, the IRS issued guidance regarding penalty relief with regard to employers’ deposits of such employment taxes as well as a draft form for acquiring advance payments of refundable amounts of the tax credits made available through the FFCRA and the CARES Act.

For more FFCRA and CARES Act information, please see: FFCRA, Business Tax Changes, Employee Benefits Changes, Executive Compensation Limits, Charitable Contributions, and Expanded Unemployment Benefits; Saving Our Small Businesses: CARES Act Expands Economic Injury Disaster Loan Program to Provide Additional Financial Relief to Small Businesses, Saving Our Small Businesses: Lender Considerations for Participating in the New Forgivable Paycheck Protection Program Loans to Small Businesses, Saving Our Small Businesses: Congress Reaches Agreement on New For- givable Paycheck Protection Loans to Small Businesses, Saving Our Small Businesses: “Phase Three” Economic Recovery Proposal Includes New Forgivable SBA Loans for Small Businesses Impacted and Saving Our Small Businesses: SBA Disaster Assistance Loans for Small Businesses Impacted by COVID-19.

IRS Notice 2020-22

IRS Notice 2020-22, issued on March 31, 2020, provides relief to employers entitled to benefit from (i) the refundable tax credits relating to “qualified sick leave wages” and “qualified family leave wages” paid by employers, as provided under the FFCRA (the “FFCRA Credit”), and (ii) the refundable Employee Retention Credit under the CARES Act (the “Retention Credit” and together with the FFCRA Credit, the “Refundable Credits”). For additional detail regarding the FFCRA Credit and the Retention Credit see UPDATE On The Families First Coronavirus Response Act (FFCRA) Leave Protections Following Updated DOL Guidance and UPDATE: CARES Act Guide: Overview of Key Business Tax Provisions. IRS Notice 2020-22 provides that the failure to deposit penalty imposed by Code Section 6656 will not apply to an employer’s failure to timely deposit employment taxes to the extent that the amounts not deposited are equal to or less than the amount of the Refundable Credits to which the employer is entitled under the FFCRA and the CARES Act. 

With respect to the FFCRA Credit, an employer may reduce without penalty under Code Section 6656, the amount of a deposit of employment taxes by the amount of qualified leave wages and qualified health plan expenses paid in the calendar quarter prior to the required deposit, plus the amount of the employer’s share of Medicare tax on such qualified leave wages, as long as the employer does not also seek an advance credit for the same amount. With respect to the Retention Credit, an employer may further reduce, without penalty under Code Section 6656, the amount of the deposit of employment taxes by the amount of qualified retention wages paid in the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit with regard to the same amount.

Form 7200

On March 31, 2020, the IRS also released a draft Form 7200, “Advance Payment of Employer Credits Due to COVID-19,” and draft instructions for use by specified employers requesting an advance payment of the Refundable Credits.  The draft instructions provide that employers may file Form 7200 to request an advance payment of the Refundable Credits.  Such employers will need to reconcile any advance credit payments and reduced deposits on their employment tax returns for 2020.  Typically, an employer should first reduce employment tax deposits to account for the Refundable Credits.  The employer can then request the amount of the Refundable Credits that exceeds its reduced deposits by filing Form 7200 or waiting to get a refund when it claims the Refundable Credits on its employment tax return. No employer is required to file Firm 7200.

Examples:

• If an employer is entitled to a FFCRA Credit of $5,000 and is otherwise required to deposit $8,000 in employment taxes, the employer could reduce its federal employment tax deposits by $5,000.  The employer would only be required to deposit the remaining $3,000 on its next regular deposit date. 
• If an employer is entitled to a Retention Credit of $10,000 and was required to deposit $8,000 in employment taxes, the employer could retain the entire $8,000 of taxes as a portion of the Retention Credit it is entitled to and file a request for an advance payment for the remaining $2,000 using form 7200.

An employer can file Form 7200 for an advance payment of the Refundable Credits anticipated for a quarter any time before the end of the month following the quarter in which the employer paid the qualified wages.  If necessary, an employer can file Form 7200 several times during each quarter; provided that the employer should not file Form 7200 after it files Form 941 for the fourth quarter of 2020 or it files Form 943, 944, or CT-1 for 2020.  Further, the employer should not file Form 7200 to request an advance payment for any anticipated Refundable Credit for which the employer already reduced its deposits.

Please visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19