COVID Regulatory and Tax Updates
A Procedural Overview of COVID-19 Employment Tax Credits and Deferral
- The Families First Coronavirus Response Act tax credit and employment tax relief provisions in the CARES Act could help employers who are facing challenges as a result of the coronavirus pandemic.
- There are restrictions preventing employers from obtaining more than one form of relief. If you take advantage of one, you may not be eligible to claim the other.
Employers may be eligible for certain employment tax credits and employment tax deferral to help with the challenges faced due to COVID-19. Below is a summary of how employers can claim these credits and defer employment taxes.
Families First Coronavirus Response Act (FFCRA) Tax Credit
The FFCRA requires certain employers to pay emergency sick leave and emergency leave under the Family Medical Leave Act (FMLA). See CLA’s Frequently Asked Questions (FAQs) to understand when employees are eligible for FFCRA leave and which employers must provide FFCRA leave.
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Employers that pay qualified sick leave and/or qualified family leave in accordance with the FFCRA can receive a refundable tax credit to help recoup the cost of providing the qualified leave. On March 27, 2020, the IRS issued FAQs discussing how to claim the FFCRA credit and documentation requirements.
Immediate offset of employment tax deposits
If an employer pays FFCRA qualified leave, it is entitled to an immediate offset in employment tax deposits.
Example: An employer issues payroll checks on April 20, 2020, for the payroll period April 4, 2020, through April 18, 2020. During the payroll period, the employer has 15 full-time employees who each take five days of FFCRA leave, and the total wages paid for the leave is $30,000. The employer’s total payroll for the payroll period, including the FFCRA leave, is $100,000. The employer is a bi-weekly depositor. For simplification, assume federal income tax is withheld at a rate of 15%. For purposes of this example, state and local taxes are ignored.
Employment tax withholdings
The employer is required to withhold federal income tax and the employee’s share of Social Security and Medicare taxes. The employer is also required to compute the employer’s share of Medicare tax. The employer is not required to compute or pay the employer’s share of Social Security tax on the FFCRA leave wages.
Employment taxes on the $30,000 FFCRA leave wages:
- Federal income tax withholding (15%) = $4,500
- Employee Social Security and Medicare taxes (7.65%) = $2,295
- Employer’s Medicare tax (1.45%) = $435
- Total = $7,230
Employment taxes on $70,000 regular wages:
- Federal income tax withholding (15%) = $10,500
- Employee Social Security and Medicare taxes (7.65%) = $5,355
- Employer’s Social Security and Medicare taxes (7.65%) = $5,355
- Total = $21,210
Total employment taxes for the payroll period is $28,440 ($7,230 + $21,210). Since the employer is a bi-weekly depositor, the deposit would normally be due April 24, 2020.
The employer is entitled to a tax credit of $30,435. This represents the total FFCRA leave wages paid ($30,000) plus the employer’s Medicare tax ($435) associated with FFCRA leave wages.
Claiming the credit
Since the employer is eligible for a FFCRA tax credit of $30,435 and has a total employment tax deposit requirement of $28,440, the employer does not have to make a deposit on April 24, 2020. Additionally, the employer is entitled to an advance credit of $1,995 ($30,435 - $28,440).
The employer can file Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim the $1,995 credit. Form 7200 can be filed multiple times during a quarter. The IRS has confirmed employers will reconcile the advance credit and their deposits with respect to FFCRA leave wages on Form 941 (or other applicable federal employment tax return). As of April 8, 2020, the IRS has not released a revised Form 941.
Qualified health care costs
Employers can increase the FFCRA tax credit for qualified health care plan expenses allocable to FFCRA leave wages. Qualified health plan expenses are properly allocated to FFCRA leave wages if the allocation is made on a pro rata basis among covered employees and pro rata on the basis of periods of coverage.
The IRS says employers may use any reasonable method to determine and allocate health plan expenses. For fully-insured group health plans, the IRS listed the following methods as reasonable:
- The COBRA applicable premium for the employee typically available from the insurer;
- One average premium rate for all employees; or
- A substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage.
For self-insured plans, the IRS listed the following as reasonable methods:
- The COBRA applicable premium for the employee typically available from the administrator; or
- Any reasonable actuarial method to determine the estimated annual expenses of the plan.
Example: Assume in the above example, the employer has 50 employees covered by a fully-insured health plan. Each employee works five days per week throughout the year, or 260 work days. The total annual premium for the health plan (including the amount paid by the employer and the amount paid by the employees through salary reduction) is $650,000.
If the employer uses one average premium rate for all employees, the average annual premium rate per employee is $650,000 divided by 50, or $13,000. The daily average premium rate equals $13,000 divided by 260, or $50. This is the amount of qualified health expenses allocated to each day of qualified paid leave per employee. The total allocable health plan care costs for the FFCRA leave wages would be $3,750 ($50 x 5 days = $250/employee x 15 employees). This increases the total tax credit to $34,185 ($30,435 + $3,750). The tax credit would be reduced by the employment tax deposit ($28,440) leaving $5,745 available for refund that can be reported on Form 7200.
Record keeping requirements
According to the IRS, an employer must maintain records substantiating that an employee is eligible for FFCRA leave. An employer also has to maintain records substantiating the employer is entitled to the tax credit.
The documentation includes:
Employee eligibility documentation
An employer must receive a written request for FFCRA leave from the employee that includes:
- The employee’s name;
- A statement of the COVID-19-related reason the employee is requesting leave and written support for such reason; and
- A statement that the employee is unable to work, including by means of telework, for such reason.
If an employee is requesting leave based on a quarantine order or self-quarantine advice, the statement should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine. If the employee is requesting leave based upon caring for a person subject to quarantine or advised to self-quarantine, the statement should include that person’s name and relation to the employee.
If an employee is requesting leave based on a school closing or the unavailability of child care, the statement from the employee should include:
- The name and age of the child (or children);
- The name of the school or place of child care that is closed;
- A representation that no other person will be providing care for the child during the period for which the employee is receiving FFCRA leave; and
- If the child is older than 14, a statement that special circumstances exist that make the employee unable to work or telework because of a need to provide child care during daylight hours.
Employer eligibility documentation
An employer must also maintain the following information:
- Documentation showing how the amount of qualified leave wages eligible for the credit was determined, including records of work, telework, and qualified leave;
- Documentation showing how the amount of qualified health plan expenses were allocated to qualified leave;
- Copies of Forms 7200 submitted to the IRS; and
- Copies of Forms 941 (or other applicable employment tax form) submitted to the IRS.
The IRS says the documentation should be retained for at least four years after the date the tax becomes due or is paid, whichever comes later.
There are two employment tax relief provisions in the CARES Act intended to help employers: the Employee Retention Credit and a deferral of the employer’s Social Security tax.
Employee Retention Credit
The CARES Act added an employee retention credit that is available to employers whose operations are fully or partially suspended due to a COVID-19 related shutdown order or whose gross receipts declined by more than 50% when compared to the same quarter in the prior year. Eligible employers may claim an employee retention credit for qualified wages paid after March 12, 2020, and before January 1, 2021. See CLA’s Tax Savings Opportunities from the CARES Act for a detailed discussion of the employer retention credit.
The credit is allowed against the employer’s portion of Social Security taxes. Similar to the FFCRA tax credit, the employee retention credit is refundable.
The employee retention credit works similarly to the FFCRA tax credit. The eligible credit is first offset against current employment tax deposits. If the employee retention credit exceeds the employment tax deposits, the employer can file Form 7200 to claim a refund of the remaining employee retention credit.
Example: Employer pays $30,000 in qualifying wages for a two-week payroll period beginning April 1, 2020. The employer is entitled to a $15,000 employee retention credit. The employer’s total employment tax liability for all wages paid during the payroll period is $10,000. The employer does not have to remit the $10,000 deposit for employment taxes and can request a refund of $5,000 on Form 7200. The employer will reconcile the advance credits and qualifying wages on Form 941.
Deferral of employer’s Social Security tax
The CARES Act allows an employer to defer its share of Social Security taxes (6.2%). Unlike other provisions in the CARES Act, the deferral is not limited to employers of a certain size. The deferral is available with respect to employment tax deposits due after March 27, 2020, and before January 1, 2021. Employers who elect to defer payment will need to deposit half of that delayed amount by December 31, 2021, and the other half by December 31, 2022.
The deferral of employment taxes is not available to employers that receive partial or full forgiveness on a loan under the Payroll Protection Program (PPP).
If an employer wants to take advantage of the deferral, how does it notify the IRS? There is currently no guidance on how employers will report the deferral. It is likely the deferral will be reported on Form 941 (or other applicable employment tax return). Several payroll software vendors have not updated their software to allow for the deferral, but are expected to do so very soon.
It is also unclear whether the IRS will allow employers to claim a refund on deposits that could have been deferred, but were not deferred due to the lack of guidance.
Example: Employer issued paychecks on April 7, 2020, for the payroll period March 28, 2020, through April 6, 2020. The total liability for the employer’s share of Social Security taxes was $100,000. The employer’s payroll vendor has not updated its software to account for the deferral, so the vendor sweeps the employer’s designated account for employment taxes, including the $100,000 for the employer’s share of Social Security taxes, and makes the deposit. It is not clear whether the IRS will issue guidance allowing the employer to claim a refund for the $100,000 and then allow deferral of $50,000 to December 31, 2021, and $50,000 to December 31, 2022.
How do the credits interact?
The simplest way to think about it is there is no “double-dipping.” If an employer receives a PPP loan and the loan is fully or partially forgiven, the employer cannot use the same wages used to obtain forgiveness to claim the FFCRA credit. If an employer receives a PPP loan, it may not claim an employee retention credit. The employer likewise cannot use the same wages used to claim the FFCRA credit to claim the employee retention credit and vice versa. Use our side-by-side comparison chart to review the different employer credits.
How we can help
CLA’s tax professionals are here to help you navigate these new employment tax credits and take advantage of the credits.