May 21, 2020
Congress has passed two major pieces of legislation intended to stimulate the economy and provide direct support to businesses, their employees, and others hurt by the economic effects of the fight against the coronavirus and COVID-19. Many benefits take the form of refundable payroll tax credits for employers. The IRS is waiving certain penalties related to payroll taxes, and allowing employers to request advance payment of refunds under these new laws.
Payroll Tax Credits
Paid Sick Leave and Family Leave
The Families First Coronavirus Response Act (FFCRA) creates temporary systems for paid sick leave, paid family leave, and expanded unpaid family leave. Employers with fewer than five hundred employees are subject to these provisions, although employers with fewer than fifty employees may request a waiver.
The amount of leave and rate of pay depends on the purpose of the leave. Paid leave for one’s own diagnosis or quarantine is capped at $511 per day. Paid leave to care for a sick or quarantined family member or a child out of school is capped at $200 per day.
The payroll tax credit applies to the employer’s share of Social Security taxes. It is available in an amount equal to the amount paid to the employee during their leave, up to the same maximum amounts described above, for a maximum of ten weeks.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers may claim a payroll tax credit against their Social Security tax obligation if:
– They have suspended operations or shut down entirely because of a government order; or
– Their gross receipts during a calendar quarter in 2020 were at least fifty percent less than gross receipt in the corresponding quarter of 2019.
The credit is equal to fifty percent of wages, up to a maximum of $10,000 per worker. Employers with more than one hundred employers may only take the credit for workers that have been furloughed. Smaller employers may claim the credit for all employees. Eligibility for the credit ends on December 31, 2020 or the quarter after an employer’s gross receipts exceed eighty percent of gross receipt for the prior year’s quarter, whichever is sooner.
Advance Payment of Tax Credits
Most employers must use Form 941, the quarterly return for payroll taxes, to claim these payroll tax credits. The IRS recently released Form 7200, which employers may use to request advance payment.
Extensions and Waivers
Deferral of Payroll Tax Payments
An employer’s payroll tax obligation includes “trust fund taxes” withheld from their employees’ paychecks. Because of the trust involved in the employer’s role, the IRS takes enforcement of payroll taxes very seriously.
It is therefore notable that the CARES Act allows employers to defer payment of fifty percent of their portion of Social Security tax through the end of 2020. Half of the deferred amount is due by the end of 2021, and the rest by the end of 2022.
Waivers of IRS Penalties
Perhaps even more notable than the deferred payment deadline is the IRS’s waiver of penalties for failure to deposit trust fund taxes. The waiver applies if the employer is eligible for a payroll tax credit related to COVID-19, did not request advance payment of the credit, and failed to make a deposit in an amount that did not exceed the maximum available credit.