IRS Issues Preliminary Guidance for Claiming New Payroll Tax Credits Provided by Families First Coronavirus Response Act
Update: This article has been updated with the latest guidance as of April 6.
On March 20, the IRS, the Treasury Department, and the Labor Department announced preliminary guidance (via IR 2020-57) for claiming the new payroll tax credits provided under the Families First Coronavirus Response Act. The Treasury Department subsequently released FAQs on March 31, providing further guidance on the implementation of these payroll tax credits, which have an effective date of April 1, 2020.
IR 2020-57 allows employers who pay wages to coronavirus-affected employees, in compliance with the Act’s mandatory paid leave benefits, to retain an amount of payroll taxes they would otherwise be required to deposit with the IRS. Employers can retain, up to the total allowable credit amount, withheld federal income taxes and both portions (employee share and employer share) of Social Security and Medicare taxes with respect to all employees. The total allowable credit amount is equal to the amount of required wages paid in accordance with the Act, plus an allocable share of qualified health plan expenses and the employer’s share of Medicare taxes attributable to such wages. The FAQs confirmed that employers can retain the total allowable credit amount from payroll tax deposits.
If there are not sufficient payroll taxes to cover the full amount of mandatory benefits paid, employers will be able file a request for an accelerated payment from the IRS. In conjunction with the FAQs, the Treasury Department has released Form 7200, Advance Payment of Employer Credits Due to COVID-19. Employers can file Form 7200 to claim an advance credit for the allowable credit amount in excess of the employer’s total payroll tax deposits.
The following examples illustrate how this would apply in two different situations:
- An eligible employer paid $5,000 in qualified sick leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare taxes) as required by the Act and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees. The employer can retain up to $5,000 of the $8,000 of taxes it was going to deposit with the IRS. The employer will only be required to deposit the remaining $3,000 on its next regular deposit date.
- An eligible employer paid $10,000 in qualified sick leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare taxes) as required by the Act and was required to deposit $8,000 in payroll taxes. The employer could retain the entire $8,000 of taxes and file a request for an advance credit for the remaining $2,000 by filing Form 7200.
The FAQs also provide guidance for documentation employers should obtain in order to substantiate their eligibility to claim these credits (questions 44 to 46).
Equivalent income tax credits are available to eligible self-employed individuals unable to perform services due to coronavirus-related circumstances. Those individuals will claim the credits on their income tax return, and they can take the expected credit amount into account in reducing their 2020 estimated tax payments.
The Labor Department will provide a 30-day non-enforcement period for good-faith compliance efforts and will instead focus on compliance assistance during that period. Additionally, the Labor Department will provide further guidance on exemption eligibility for businesses with fewer than 50 employees.
We encourage all businesses potentially impacted by the Act’s mandatory paid leave benefits to seek proper legal counsel in determining how to apply these labor and employment laws to your specific situation.
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