On April 1, 2020, the IRS finalized Form 7200 – Advance Payment of Employer Credits Due to COVID-19 and the accompanying instructions. The Form provides additional guidance for eligible employers to take advantage of refundable tax credits under the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security Act (CARES) Act.
Employer Relief under the FFCRA. Under the FFCRA, an eligible employer’s costs associated with required paid family and sick leave are offset dollar-for-dollar (up to certain amounts) with refundable tax credits against employment tax. An eligible employer includes businesses and tax exempt organizations with fewer than 500 employees that is required to provide qualified sick and family leave wages under the FFCRA. Certain self-employed individuals are entitled to similar credits.
Employer Relief under the CARES Act. The CARES Act provides a refundable credit to eligible employers equal to 50 percent of qualified wages paid to employees (“employee retention credit”). Eligible employers are those that have had to fully or partially suspend business operations as a result of COVID-19 and those that have had a significant decline in gross receipts since 2019. Governmental employers and self-employed individuals are not eligible for this credit.
Below is a summary of how an eligible employer can request advance payment of these credits from the IRS.
Advance Payment of Employer Credits
Using Form 7200, an employer may request advance payment of the qualified sick and family leave credits and the employee retention credit from the IRS, if necessary. Prior to requesting advance payment, an employer should utilize the credits by retaining employment taxes equal to the amount of qualified sick and family leave wages paid and their employee retention credit instead of depositing those amounts with the IRS. The applicable employment taxes include the employer and employee shares of Social Security and Medicare taxes and any withheld federal income tax.
If the retained employment taxes do not cover the cost of qualified sick and family leave payments (plus related health plan expenses and the employer’s share of Medicare on the qualified leave wages) and the employee retention credit, an employer can file Form 7200 to request advance payment of the credits from the IRS. An employer that receives advance payment of tax credits will need to reconcile those credits and reduced employment tax deposits on its 2020 employment tax return.
Example. Consider an employer allowed an employee retention credit of $5,000 and qualified family leave credit in the amount of $6,000. The total retained employment taxes are equal to $7,000. The employer may request advance payment of the credits in the amount of $4,000 by submitting Form 7200. If the amount of employment taxes retained was instead $15,000, the employer would not be eligible to submit Form 7200 and will need to deposit $4,000 in employment taxes with its next return.
Employers that meet the requirements under the FFCRA and/or CARES Act and File Form(s) 941, 943, 944 or CT-1 may file Form 7200 to request advance payment of refundable tax credits. As stated above, an employer may only file Form 7200 for advance payment after it reduces its employment tax deposits to determine if those will cover the required payments under the FFCRA and CARES Act. If those amounts do not cover the required payments, filing Form 7200 is appropriate.
Form 7200 may be filed at any time during the month following the quarter in which the qualified wages were paid. If needed, the Form may be filed multiple times during a given quarter. Employers should not file Form 7200 after filing Form 941 for Q4 of 2020, or making 2020 filings for Forms 943, 944 or CT-1.
The tax credits for qualified sick and family leave wages apply to wages paid from April 1, 2020, to December 31, 2020. The employee retention tax credit available due to suspension of operations, government shutdown or significant reduction in gross receipts applies to wages paid after March 12, 2020, and before January 1, 2021. Employers may take advantage of the credit for significant decline in gross receipts for the period beginning with a quarter in which gross receipts are less than 50 percent of what they were in that quarter in 2019 and ending with the quarter that begins after a quarter in which gross receipts were greater than 80 percent of what they were in that quarter in 2019.
The common-law employer of the individuals entitled to the required payments under the FFCRA and CARES Act receives the refundable tax credit, regardless of whether it uses a third-party payer. Examples of third-party payers include payroll service providers professional employer organizations, certified professional employer organizations or Section 3504 Agents.
Some restrictions apply to an employer’s ability to receive advance payment of refundable tax credits:
- Self-employed individuals cannot request an advance payment of credits for sick and family leave.
- An employer that receives a Small Business Interruption Loan under the CARES Act cannot claim the employee retention credit.
- An employer can receive tax credits for qualified leave wages under the FFCRA and a Small Business Interruption Loan under the CARES Act; however, these wages do not qualify as “payroll costs” for purposes of loan forgiveness under the CARES Act.
- If an employer receives a credit for qualified leave wages under the FFCRA, those wages do not count as qualified wages under the CARES Act. An employer cannot receive a double-credit on wages.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties