The U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) have recently released Q&As and FAQs regarding accessing employer tax credits under the Families First Coronavirus Response Act (FFRCA) and the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
To access the DOL Q&As regarding the now payable benefits under the FFRCA’s Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act, as well as an official temporary rule, follow this link:
To access the IRS FAQs that guide employers through the process of documentation of leaves and applying for FFRCA tax credit, as well as the Employee Retention Credit under the CARES Act, follow this link:
The CARES Act – Employee Retention [Tax] Credit
The Employee Retention [Tax] Credit provides relief to employers of all sizes in the form of a refundable payroll tax credit of 50% of all “qualified wages” paid (up to $10,000 per employee) during the COVID-19 crisis if: (i) operations were fully or partially suspended due to a shut-down order; or (ii) gross receipts declined by more than 50% compared to the same quarter in the prior year. The tax credit is allowable on wages and health plan expenses paid or incurred after March 12. 2020. The tax credit is not available, however, to employers taking an SBA loan under the Paycheck Protection Program.
For employers with fewer than 100 full-time employees in 2019 (as defined by Internal Revenue Code Section 4980H), all employee wages are “qualified wages” whether the employer is open for business or subject to a shut-down order. For employers of this size, even if employees work full time and are paid for full-time work, the employer may still claim the credit.
For larger employers, “qualified wages” are those payments made to employees who are not actively providing services due to a full or partial shut-down order or because of a 50% decline in gross receipts. Note that the law does not require employers to pay such wages.
Employers are not eligible for the Employee Retention Credit on the same wages paid for sick leave or extended family and medical leave for which employers receive credits under the Families First Coronavirus Response Act (FFCRA).
The FFCRA – Tax Credits
For a summary of the tax credits available under the FFCRA see the summary provided by the Jones Waldo Employment Group, which can be found here: https://joneswaldo.wpengine.com/legal-update-families-first-coronavirus-response-act-summary-of-new-paid-leave-laws-2/.
How to Access the Tax Credits
The tax credits for both FFCRA and the CARES Act are taken against the taxes imposed by Internal Revenue Code Sections 3111(a) (the social security tax) and 3221(a) (the Railroad Retirement Tax Act). Employers anticipating a tax credit are advised to retain an amount equal to the qualified wages (rather than depositing them with the IRS) of all federal employment taxes related to wages paid between April 1, 2020, and December 31, 2020. Employers may hold back the federal income taxes withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare with respect to all employees. A revised IRS Form 941 will provide instructions about how to reflect the reduced liabilities for the quarter related to the deposit schedule. Note that if the amount of tax credits claimed exceeds the employer portion of the federal employment taxes, the excess is treated as an overpayment and refunded through the normal refund process.
Employers will not be charged a penalty for failing to deposit federal employment taxes to the extent that such failure to deposit is (i) related to qualified leave wages, (ii) the leave is paid in the calendar quarter before the required deposit, (iii) the amount not timely deposited is less than or equal to the amount of the anticipated tax credits for the calendar quarter as of the time of the required deposit, and the employer did not seek advance credit.
Where monies held back from deposit are not sufficient to cover the cost of covering the qualified wages, the employer may file a request for advance payment of tax credit from the IRS using IRS Form 7200, Advance of Employer Credits Due to COVID-19. While the IRS has not promised a date by which they will be able to provide an advance, they are scheduled to begin in April 2020. IRS Form 7200 can be found here: https://www.irs.gov/pub/irs-pdf/f7200.pdf, and the instructions to the form here: https://www.irs.gov/instructions/i7200.
Employers must retain records and documentation supporting each employee’s FFRCA leave in order to substantiate a claim for a tax credit.
Any tax credits received are included in the employer’s gross income, but the payments for leave are deductible as ordinary and necessary business expense in the taxable year in which the wages are paid or incurred. Qualified leave wages paid to employees are fully subject to withholding of federal income tax and the employee’s share of social security tax and Medicare taxes. These wages are also considered wages for purposes of other benefits; e.g., contributions to 401(k) plans.
For further information or assistance, please feel free to reach out to:
Geoffrey Gunnerson at firstname.lastname@example.org or (801) 407-6541
Bruce Babcock at email@example.com or (801) 534-7246
Jim Rock at firstname.lastname@example.org or (801) 534-7488