There are three COVID-19 related tax credits that were introduced under the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which are subject to various limitations:
- Emergency Paid Sick Leave Act tax credits – a dollar-for-dollar tax credit for qualifying wage payments of emergency paid sick leave;
- Emergency Family and Medical Leave Expansion Act tax credits – a dollar-for-dollar tax credit for qualifying wage payments of family leave; and
- The Employee Retention Tax Credit – a tax credit equal to 50% of qualifying wages payments made to employees.
Employers claim these credits by retaining payroll taxes, in an amount equal to the accrued credits, instead of depositing the amount with the IRS. The payroll taxes an employer may retain include both the employer and employee share of Social Security and Medicare taxes (i.e., FICA) and withheld federal income taxes with respect to all employees. For example, an employer that has accrued $5,000 in tax credits and is required to make an $8,000 deposit, will retain $5,000 and deposit the remaining $3,000.
Most employers will also have the option to defer any 2020 payment of the employer portion of Social Security taxes until 2021 and 2022. However, the three COVID-19 tax credits offset the employer portion of Social Security taxes. This means that only employers that do not have sufficient credits to reduce the employer portion of their Social Security payroll taxes to $0 will be able to utilize this deferment option. Stated another way, any employer that is due a refund of their COVID-19 tax credits, and has reduced the employer portion of their Social Security payroll taxes to $0, will not need to defer such payments.
Advance credit payments
An employer may request an advance credit payment from the IRS using Form 7200, Advance Payment of Employer Credits Due to COVID-19, if:
- The payroll taxes retained by the employer are not enough to cover the employer retention credit and the costs of the qualified sick and family leave wages; or
- The employer is due an additional refund of the tax credits because employer’s accrued credits exceed the amount it was required to deposit. For example, an employer that has accrued $10,000 in tax credits, but is only required to make an $8,000 deposit, will retain $8,000 and may request an advance payment for $2,000.
Employers are not required to request an advance credit; they may wait until they file their employment tax return to get a refund.
Reporting and record-keeping
Employers must reconcile their advance credit payments and reduced deposits on their 2020 employment tax returns. For Form 941 filers, the credits may be claimed on the second, third, and fourth quarter returns. For Form 944 filers, the credits will be claimed once on the annual return.
All copies of Form(s) 7200 filed with the IRS should also be retained. Additionally, to substantiate the claimed credits, employers should maintain employment tax records for at least four years, including documents that show:
- how the employer figured the amount of qualified sick and family leave wages eligible for the credit.
- how the employer figured the amount of the employee retention credit.
- how the employer figured the amount of qualified health plan expenses to be allocated to wages.
- how the employer determined that the employees were qualified to receive sick and family leave wage.
- the employer’s eligibility for the employee retention credit based on suspension of operations or a significant decline in gross receipts.
Information about COVID-19 and its impact on local, state and federal levels is changing rapidly. This article may not reflect updates to news, executive orders, legislation and regulations made after its publication date. Visit our COVID-19 resource page to find the most current information.