Payroll Tax Credits in Response to COVID-19
By Mario J. Fazio and Jonathan T. Hyman
The recently-enacted CARES Act and Families First Coronavirus Relief Act (“FFCRA”) provide important tax credits to businesses and non-profit organizations to fund the expansion of family and sick leave for employees, as well as tax credits to retain employees during the economic slowdown in 2020 as a result of COVID-19. The tax credits provide cash to an employer to defray the payroll costs for such qualified leave and the retention of employees by directly offsetting federal payroll tax deposits that an employer would otherwise remit to the IRS for each payroll. Moreover, if the tax credits exceed an employer’s payroll tax deposit for a payroll period, the employer can file IRS Form 7200 to request a cash payment of such excess credit from the IRS to the employer.
Expanded Sick and Family and Medical Leave Tax Credits. By way of background, the FFCRA increases sick leave and family and medical leave in response to the COVID-19 emergency for businesses and non-profits that have fewer than 500 employees. An employer’s policies must be amended to comply with these new sick leave and family and medical leave laws, which provide up to an additional two weeks of paid sick leave and an additional ten weeks of family and medical to employees who are unable to work or telework for specific qualifying reasons as a result of the COVID-19 emergency. To be reimbursed for the cost of this additional leave, an employer may claim a 100% tax credit for the cost of the qualified leave, including the cost of associated health care benefits. For more details on the expanded qualified leave please click here.
Employee Retention Credits. The CARES act provides an employee retention tax credit (“Employee Retention Credit”) to employers who have employees during any payroll periods from March 12, 2020 through December 31, 2020. The tax credit is 50% of the payroll cost (up to $10,000 per employee), making the maximum Employee Retention Credit $5,000 per employee. To be eligible, the business must have been suspended or closed due to government order (which includes the Ohio’s Stay at Home Order effective March 23, 2020) or suffered a significant decline in gross receipts during the calendar quarter. For employers that averaged 100 or fewer employees in 2019, the Employer Retention Credit is for all wages paid to employees during eligible quarters of 2020. An Employer offsets the Employee Retention Credit against the payroll tax deposit otherwise remitted to the IRS. However, if a Paycheck Protection Loan is obtained, the employer will not be eligible for the Employer Retention Credit. For more details on the Employee Retention Credit, click here.
How to Claim the Tax Credits. The Employee Retention Credit and the sick leave and family and medical leave tax credits are claimed by an employer as dollar-for-dollar offsets against payroll tax deposits otherwise required to be remitted to the IRS by the employer, including the income tax withholding and both the employer’s and employees’ portion of FICA. The IRS failure to deposit penalty on payroll taxes will not apply to the proper reduction in the deposit amount for the anticipated tax credits. However, the employer should not file the Form 7200 for a cash payment for the same tax credits used to reduce the payroll tax deposit. The Form 7200 is filed only if the payroll tax deposit amount is less than the tax credit amount, and the employer seeks a cash advance payment of such excess credit amount. By reducing the payroll tax deposit by the amount of the tax credits and making an advance cash payment to an employer for any excess credits, the IRS provides immediate cash to the employer to assist in the payment of the qualified leave and retention of employees.
Recordkeeping in Case of Audit. The IRS advises an employer to keep all records of employment taxes for at least four years. Like all business and tax records, these records may be needed in the future in the event of an IRS audit. An employer’s records should include the following information:
- Specific documentation of an employee’s need for paid sick leave or paid expanded family and medical leave, including:
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- The employee’s name;
- The date(s) for which leave is requested;
- A statement of the coronavirus related reason the employee is requesting leave and written support for such reason;
- A statement that the employee is unable to work, including by telework, for such reason; and
- For a leave request based on a quarantine order or self-quarantine advice (the employee’s or someone else’s for whom the employee is providing care), the employee’s statement should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee; or
- For a leave request based on a school closing or child care provider unavailability, the statement from the employee should include: the name and age of the child (or children) to be cared for; the name of the school that has closed or place of care that is unavailable; and a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave.
- Documentation to show how you figured the amount of qualified sick and family leave wages eligible for the credit.
- Documentation to show how you figured the amount of the employee retention credit.
- Documentation to show how you figured the amount of qualified health plan expenses that you allocated to wages.
- Documentation to show how you determined that the employees were qualified to receive sick and family leave wages, including any additional information set out in Frequently Asked Questions or other guidance on IRS.gov.
- Documentation to show your eligibility for the employee retention credit based on suspension of operations or a significant decline in gross receipts.
- Copies of completed Form(s) 7200 you filed with the IRS. For more information please see Instructions to Form 7200.
The attorneys at Meyers Roman are available to provide you with guidance regarding the COVID-19 tax credits, your current leave policies and updating such policies, and record keeping relating to qualified leave, tax credits and payroll tax deposits. Please contact any of the following attorneys if you would like to discuss: