The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Families First Coronavirus Response Act (“FFCRA”) provide eligible employers with refundable payroll tax credits for certain wages paid to employees during the Coronavirus pandemic.
The CARES Act generally provides eligible employers a tax credit for 2020 wages paid after March 12, 2020 in a quarter during which the employer’s business is suspended or a 50% gross revenue reduction occurs. The FFCRA generally provides eligible employers a tax credit for qualified sick leave wages and qualified family leave wages paid pursuant to the FFCRA for leave during the period April 1, 2020 through December 31, 2020. For additional information regarding eligibility requirements for these programs, see here and here.
The Internal Revenue Service recently published lists of frequently asked questions (the CARES Act FAQ and the FFCRA FAQ) to provide guidance to eligible employers on how they can use the tax credits to increase their cash flow. The FAQs explain that there are multiple ways in which eligible employers can turn the credits into cash:
- Eligible employers may receive the tax credits quickly by reducing the amount of payroll taxes they are required to deposit with the IRS, including taxes already withheld from employees. This reduction in deposits will not cause a penalty and should be reported on the employer’s subsequently filed IRS Form 941.
- Rather than waiting to reduce their deposits of payroll taxes, eligible employers may request an advance refund of the credits by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19. The Form 7200 can also be filed more than once in a quarter, if an eligible employer underestimated the amount of its qualified wages. Employers that file an IRS Form 7200 will need to reconcile the advance credit and their deposits with the qualified wages reported on their subsequently filed IRS Form 941.
- Eligible employers may claim the tax credits on their federal employment tax returns (e.g. IRS Form 941). To the extent the amount of the tax credit exceeds the employer’s Social Security tax liability, the employer will receive a refund.
Employers that utilize a third-party payer, such as a PEO, to report and pay their federal employment taxes are entitled to the tax credits if they are otherwise eligible. Such employers may file their own IRS Form 7200 to request an advance refund of the tax credits, but must provide a copy of the form to their third-party payers so the credits can be properly reported.
Eligible employers may receive tax credits under both the CARES Act and the FFCRA, but not for the same wages. Qualified wages that give rise to a tax credit under the FFCRA are not eligible for the CARES Act payroll tax credit. Furthermore, any qualified wages taken into account in determining tax credits under the FFCRA are excluded when determining tax credits under Section 45S of the Code related to paid family and medical leave.
WilmerHale tax and employment specialists are available to help employers determine their eligibility for CARES Act and FFCRA payroll tax credits and to advise employers on how to best take advantage of the tax credits provided by Coronavirus legislation.