April 09, 2020
The Families First Coronavirus Response Act (the “Families First Act”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) contain tax relief provisions that are intended to provide companies with much-needed liquidity as they continue to battle the COVID-19 pandemic. On March 31, 2020, the IRS issued Notice 2020-22, which permits employers to immediately receive the benefits of certain employment tax credits available under the Families First Act and CARES Act by reducing employment tax deposits that such employers would otherwise be required to submit to the IRS (including any deposits attributable to income and employment taxes withheld from amounts paid to an employee) without penalty. Additionally, on the same date, the IRS released Form 7200 (and instructions to the Form 7200) allowing for advance payment of the available employment tax credits to employers.
Under the Families First Act, full-time employees of companies with fewer than 500 employees have the right to receive: (i) up to 80 hours of paid sick leave at the employee’s regular rate of pay, up to $5,110 in the aggregate where such employee is unable to work for specified reasons related to COVID-19 and (ii) up to 80 hours of paid sick leave at 2/3 of the employee’s regular rate of pay, up to $2,000 in the aggregate, where such employee is caring for others impacted by the COVID-19 pandemic or because of the closing of a school or other care facility. The Families First Act provides employers with a tax credit against the employer’s payroll taxes equal to 100% of all amounts paid in respect of this mandated paid sick leave (including any wages paid in respect of this mandated paid sick leave (“Qualified Leave Wages”), health insurance costs related to Qualified Leave wages and the employer’s share of any Medicare taxes imposed on Qualified Leave Wages) (collectively, “Qualified Leave Payments”).
Additionally, the CARES Act provides a refundable payroll tax credit up to 50% of eligible wages (including the costs of health insurance benefits attributable to such wages) that are paid by an eligible employer to employees during a quarter in which the eligible employer’s (i) operations were fully or partially suspended due to a COVID-19 related shut-down order or (ii) gross receipts declined by more than 50% compared to the same quarter in the prior year. The payroll tax credit also applies to wages and costs of providing related health insurance benefits that are paid between March 13, 2020 and December 31, 2020. The credit is capped at $10,000 (i.e., a credit of $5,000) of wages and related health insurance benefits per employee (“Qualified Retention Payments”). For eligible employers with 100 or fewer employees, all employee wages paid qualify as eligible wages for the purpose of the payroll tax credit. For eligible employers with more than 100 employees, only wages paid to employees when they are not providing services due to a COVID-19 related shut-down order or a 50% reduction in gross receipts are eligible for the payroll tax credit. The refundable payroll tax credit is not available to an employer that receives a loan pursuant to the Paycheck Protection Program. For additional insights, please see “Tax Relief Provisions in the CARES Act Stimulus Package.”
In order to allow employers to recoup such credits and increase liquidity as quickly as possible, the IRS announced in Notice 2020-22 (and further confirmed in FAQs: Employee Retention Credit under the CARES Act, on the IRS website) that it will not assert a late deposit penalty pursuant to Section 6656 of the Internal Revenue Code against an employer with respect to employment taxes relating to Qualified Leave Wages if (i) the employer paid Qualified Leave Wages to its employees in the calendar quarter prior to the date on which the employment taxes were required to be deposited, (ii) the amount of employment taxes that were not timely deposited did not exceed the amount of the employer’s anticipated credits arising from the payment of Qualified Leave Payments at the time of the required deposit and (iii) the employer did not did not seek payment of an advance credit by filing an IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19) with respect to the anticipated credits it relied upon to reduce its deposits. Additionally, Notice 2020-22 provides that the IRS will not assert a late deposit penalty pursuant to Section 6656 of the Internal Revenue Code against an employer with respect to employment taxes relating to Qualified Retention Payments if (i) the employer paid Qualified Retention Payments to its employees in the calendar quarter prior to the date on which the employment taxes were required to be deposited, (ii) the amount of employment taxes that the employer does not timely deposit, less the amount of employment taxes not deposited in anticipation of the credits claimed for Qualified Leave Payments, is less than or equal to the amount of the employer’s anticipated credits under the CARES Act arising from the payment of Qualified Retention Payments and (iii) the employer did not seek payment of an advance credit by filing IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19) with respect to the anticipated credits it relied upon to reduce its deposits.
In addition, the IRS published Form 7200 (Advance Payment of Employer Credits Due to COVID-19). Form 7200 allows employers to request a refund for both the anticipated employment tax credits arising from the payment of Qualified Leave Payments and the anticipated employment tax credits arising from the payment of Qualified Retention Payments. Employers can fax the Form 7200 to the IRS in order to request an advance of payments of employment tax credits at any time before the end of the month following the quarter in which the applicable payments were paid by the employer. Furthermore, the instructions to Form 7200 provide that employers can file Form 7200 several times during each quarter if necessary. Employers should not file Form 7200 to claim a credit for any employment tax credits that is used to reduce the amount of its employment tax deposits due to the IRS.
This guidance is welcome news for employers that anticipate receiving tax credits with respect to Qualified Leave Payments and Qualified Retention Payments because such guidance allows such employers to immediately utilize amounts (including income and withholding taxes withheld from wages paid to an employee) that otherwise would have been deposited with the IRS instead of waiting until after the end of the applicable quarter to receive a refund from the IRS.
We will continue to provide updates as future developments and tax-related stimulus and incentives emerge.
Please contact any member of the Shearman & Sterling LLP Tax team for further information.