COVID-19: US employment tax relief provisions explained

Jeffrey Brown • April 02, 2020
Jeffrey Brown

In this update, we explain the US employment tax relief enacted in recent COVID-19-related legislation. On March 31, 2020, IRS issued Notice 2020-22 outlining the following:

  1. The penalty relief applicable to deposits of US Federal employment taxes including income tax withheld, Federal Insurance Contributions Act (FICA) and Railroad Retirement Tax Act (RRTA) taxes (Employment Taxes);
  2. The refundable tax credit made available under the Families First Coronavirus Response Act (Families First Act or FFA) for employers with fewer than 500 employees who are required to pay qualified sick leave and qualified family leave (Qualified Leave Wages or QLW) and qualified health plan expenses allocable to Qualified Leave Wages (Qualified Health Plan Expenses or QHE). The credit equals 100% of Qualified Leave Wages paid plus Qualified Health Plan Expenses with respect to the calendar quarter; and
  3. The refundable tax credit made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for employers experiencing full or partial business suspensions due to COVID-19-related orders from a governmental authority or experiencing a statutorily-defined decline in business. This employee retention credit equals up to 50% of qualified wages paid including allocable qualified health expenses and is limited to $10,000 per employee over all calendar quarters combined (Qualified Retention Wages or QRW).

On March 31, 2020, IRS also issued IRS Release IR-2020-62, setting forth some questions and answers regarding the employee retention credit.

The CARES Act changed the due date for payment and deposit of the employer’s share of the social security portion of FICA and RRTA taxes for deposits due from March 27, 2020 until December 31, 2020. The first 50% of the liability is due before December 31, 2021 and the remaining 50% of the liability is due before December 31, 2022. Notice 2020-22 explains IRS will not penalize an employer who does not deposit employment taxes on time to the extent  that the undeposited amounts are equal to or less than the amount of refundable tax credits to which the employer is entitled under both Acts. This relief applies to deposits of employment taxes reduced in anticipation of the Qualified Leave Wages credits paid for the period beginning April 1, 2020, and ending December 31, 2020, and in anticipation Qualified Retention Wages credits paid for period beginning on March 13, 2020, and ending December 31, 2020.

An employer will not be penalized for a failure to deposit employment taxes related to Qualified Leave Wages paid in a calendar quarter if:

  1. The employer paid Qualified Leave Wages in the calendar quarter prior to the time of the required deposit,
  2. The amount of employment taxes the employer does not deposit on time is less than or equal to the amount of the employer’s anticipated credits allowed under the FFA for the calendar quarter as of the time of the required deposit, and
  3. The employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any reduction in any required deposit may not exceed:

  • Total QLW paid plus QHE paid plus the employer’s share of Medicare tax thereon in the calendar quarter, minus
  • QLW plus QHE plus the employer’s share of Medicare tax thereon previously used to reduce a prior required deposit in the calendar quarter or claimed for payment as an advance credit.

Eligible employers will not be penalized for a failure to deposit employment taxes related to Qualified Retention Wages in a calendar quarter if:

  1. The employer paid Qualified Retention Wages in the calendar quarter prior to the time of the required deposit,
  2. The amount of employment taxes not deposited on time, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed for Qualified Leave Wages, Qualified Health Plan Expenses, and the employer’s share of Medicare tax on the Qualified Leave Wages is less than or equal to the amount of the employer’s anticipated CARES Act credits for the calendar quarter as of the time of the required deposit, and
  3. The employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19 with IRS with respect to the anticipated credits it relied upon to reduce its deposits.

The total amount of any reduction in any required deposit may not exceed:

  • Total QRW paid in the calendar quarter, minus
  • QRW previously used to reduce a prior required deposit in the calendar quarter or claimed for payment as an advance credit.

IRS Release 2020-62 further clarified that:

  1. CARES Act credits apply to qualified employers regardless of size, including tax-exempt organizations but not state and local governments and instrumentalities or small businesses who take small business loans.
  2. Qualifying employers are those whose business was fully or partially suspended by government order due to COVID-19 during the calendar quarter or who had gross receipts below 50% of the comparable quarter in 2019. Once an employer’s gross receipts go above 80% of a comparable quarter in 2019, it no longer qualifies after the end of that quarter. These measures are calculated each calendar quarter.
  3. The amount of the credit equals 50% of qualifying wages up to $10,000 in total paid after March 12, 2020 and before Jan. 1, 2021. Wages include cash payments and a portion of the cost of employer-provided health care.
  4. The credit for an employer with 100 or fewer employees on average in 2019 is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
  5. The credit for an employer with more than 100 employees on average in 2019 is allowed only for wages paid to employees who did not work during the calendar quarter.
  6. Employers are immediately reimbursed for the credit by reducing required employment tax deposits withheld from employees’ wages by the amount of the credit.
  7. Where an employer’s employment tax deposits are less than available credits, the employer can receive an advance payment of the excess from IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Fuller Landau’s US tax team is readily available to guide clients through these relief provisions. Contact us today for more information.