IRS Provides Procedural Guidance for Claiming FFCRA Paid Leave Tax Credits and Employee Retention Tax Credits
The IRS published two sets of FAQs (available here and here) and a new IRS Form 7200 (available here), providing instructions to employers looking to claim new tax credits created by the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).
The guidance allows employers to retain amounts collected from employees (including federal income taxes) as advances of the allowable credits and further provides that, if such retained amounts are insufficient to cover the allowable credits, an employer can claim an advance credit/refund from the IRS using Form 7200.
Overview of FFCRA Credits
As we discussed in our alert (available here), under the FFCRA, tax credits are available to businesses with less than 500 employees that pay qualified sick pay wages or qualified family leave wages to an employee because: (1) the employee is subject to a quarantine or isolation order; (2) the employee has been advised by a health care provider to self-quarantine; (3) the employee is experiencing symptoms of the coronavirus and seeking a medical diagnosis; (4) the employee is caring for an individual described in (1) or (2); (5) the employee is caring for a child because a school or place of care has been closed, or the child care provider of such son or daughter is unavailable due to coronavirus precautions; or (6) the employee is experiencing any other substantially similar condition as specified by the Department of Health and Human Services.
An employee who is unable to work for reasons due to a COVID-19 circumstance described in (1), (2), or (3) above is entitled to paid sick leave for up to two weeks (up to 80 hours) at the employee’s regular rate of pay, or, if higher, the federal minimum wage or any applicable State or local minimum wage, up to $511 per day and $5,110 in the aggregate. An employee who is unable to work due to a circumstance described in (4), (5), or (6) above is entitled to paid family leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $2,000 in the aggregate.
An employer is entitled to a credit equal to the required sick leave or family leave it is required to pay under the FFCRA for the period from April 1, 2020 to December 31, 2020. Additionally, the credit is available for allocable qualified health plan expenses and the employer’s share of Medicare taxes for qualified sick leave wages or qualified family leave wages. The FAQs indicate that “allocable qualified health plan expenses” should be determined by an employer on a pro rata basis among covered employees (for example, the average premium for all employees covered by a policy) and pro rata for periods of coverage (relative to the time periods of leave to which such wages relate).
Similar credits are available for self-employed individuals who are unable to work due to one of the circumstances described above.
Overview of CARES Act Employee Retention Credits
As we explained in more detail in our alert (available here), the CARES Act created a fully-refundable payroll tax credit for employers equal to 50 percent of the “qualified wages” paid by employers between March 13, 2020 and December 31, 2020. To be eligible for the employee retention credit, a business must (i) be fully or partially suspended due to an order from a governmental authority limiting travel, commerce, or meetings during the applicable calendar quarter or (ii) suffer a significant decline in gross receipts—i.e., a reduction in gross receipts of 50 percent or more during a calendar quarter when compared to the same quarter during the previous year.
Subject to certain limitations, 50 percent of the first $10,000 of compensation paid to an eligible employee during a quarterly period is eligible for a credit against the employer portion of FICA tax liability. Although the credit is in the form of a payroll tax credit, the credit it is not limited to FICA taxes attributable to the qualified wages but is equal to 50 percent of the qualified wages and can be applied against all of an employer’s FICA taxes.
Employer contributions to a qualified group health care plan that are allocable to qualified family leave wages (on a pro rata basis by employee and by time period for which the wages are paid) also entitle an employer to the employee retention credit under the CARES Act.
Procedure for Claiming Employer Credits
The FAQs published by the IRS confirm that employers that pay qualifying wages and are entitled to FFCRA or CARES Act credits should claim the credits by reporting their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns – i.e., IRS Form 941, Employer's Quarterly Federal Tax Return.
The guidance also makes clear that, because the goal of both credits is to free-up cash that can be used by employers to pay wages, employers can fund qualified wages, qualified sick leave, and qualified family leave (including the qualified health plan expenses) using all amounts collected from employees (including amounts that the credits do not offset – i.e., federal income taxes withheld from employees) that otherwise would be deposited with the IRS. On each IRS Form 941 (e.g., the IRS Form 941 due April 30, 2020 for wages paid during the first quarter of 2020), the employer should report the amount of credits and the amount of taxes it retained as payment of the credits.
To allow employees to retain taxes that have been collected from employees as credits under the FFCRA and the CARES Act, the IRS published Notice 2020-22 (available here) waiving penalties for any failure to deposit federal income taxes or FICA taxes that are retained in anticipation of receiving a credit under the FFCRA or CARES Act.
If the reduction in deposits does not equal the credits to which an employer is entitled, the employer can file the new IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance credit/refund for any remaining amounts. An employer that files IRS Form 7200 will need to reconcile the advance credit/refund and its deposits with the qualified leave wages on its IRS Form 941 for the period in which it obtains the advance credit/refund.
Self-employed individuals eligible to claim credits under the FFCRA will claim the credits on their IRS Form 1040 filed for the 2020 tax year. Such a self-employed individual may fund sick leave and family leave equivalents by taking into account the credit to which the individual is entitled when determining required estimated tax payments. Therefore, a self-employed individual can effectively reduce payments of estimated income taxes that the individual would otherwise be required to make.
Please contact any member of the Ballard Spahr's Tax Group if you have any questions about claiming the tax credits made available by the FFCRA or the CARES ACT or any other tax matters.
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