As part of the response to the COVID-19 outbreak 2 key acts have been passed by lawmakers, the CARES Act and FFCRA. These acts provided for tax credits for employers that either retain staff (Employer Retention Tax Credit or ERTC) and for paid sick leave required to be provided under the FFCRA.
Employer Retention Tax Credit
The ETRC is a $5,000 refundable credit, calculated at 50% of Qualified Wages (a max of $10,000 of wages). The credit first goes against employer Social Security and is then refundable for any amounts above the employer Social Security liability. An employer must be facing one of two defined economic hardship scenarios to be eligible, and the amount of Qualified Wages can depend on the number of employees. See more details here.
FFCRA Paid Leave
The FFCRA requires employers to provide employees with leave, either paid sick leave or expanded FMLA coverage, at set rates per day for a set period. The coverage is only for a direct diagnosis of COVID-19 or for someone that cannot work because of childcare closures. The leave is to be above any pre-existing sick leave and is funded by tax credits for employers. More details can be found here.
How to claim credits for the ERTC or FFCRA Paid Leave
The IRS released Notice 2020-22 and Form 7200 in order to provide guidance on how to claim these credits. The following outlines the order of how the credit will be claimed against an employer’s payroll tax obligation.
The IRS has laid out the following documentation requirements on Form 7200 instructions. Our guide to the ERTC has a more in-depth listing of what we think best practices are for documentation.
- Documentation to show how you figured the amount of qualified sick and family leave wages
- Documentation to show how you figured the amount of the employee retention tax credit
- Documentation to show how you figured the amount of qualified health plan expenses
- Documentation to show how you determined employees were eligible for the sick and family leave
- Documentation to show your economic hardship for any ERTC
- Copies of completed Forms 7200
How to access or retain employer tax deposits?
As of now, few if any payroll processors have provided details or procedures on how to retain any employer tax deposits. We would recommend that taxpayers calculate any credits for any upcoming payroll and communicate with their payroll specialist or representative at least 3 business days prior to any payroll processing to let them know what amount you want to retain and inquire as to what documentation you may need to provide.
How to obtain an advance payment?
If you have already paid wages that are credit eligible or your upcoming deposit is not enough to cover your credit, you can claim the excess payment by completing IRS Form 7200. The form requests your employer information, the applicable quarter of the payment of qualified expenses, the type of employment tax return filed and the amounts of credits. No other proof is required to be filed with the request (at least per IRS instructions), however, the instructions indicate required documentation (see above). The form can then be faxed to the IRS. There is no confirmed published timeline on when funds will be received, but informal IRS guidance suggest 2 weeks.
It is important that taxpayers do not take both a reduction in payroll tax deposits and request an advance payment. Any filed Form 7200 should be forwarded to your payroll processor, and we would advise you contact your payroll processor prior to filing. There has been no guidance given if the processors will prepare these forms for employers, but we consider it unlikely.
Best Practice Suggestions for Claiming Any ERTC or FFCRA Credits
Above all, we recommend any taxpayers claiming or interested in these credits should start the conversation with their processor. This process is still new to them and they may not have everything in place yet, but they will be a valuable resource and will need to ultimately reconcile these payments when filing upcoming Form 941 on an employer’s behalf.
We recommend that employers first reduce deposits rather than make a full deposit and then try to claim an advance payment later. We also recommend that each deposit be looked at individually; that is, do not rely on reducing a future deposit if your credit exceeds your current deposit. While this may potentially get in quicker than an advance payment, trying to stretch the credit over multiple deposits increases the likelihood of errors.
The IRS has provided in its guidance that any failure to deposit penalties as a result of these programs are waived. It is likely that there will be a degree of leniency with the IRS in implementing this program, but this is not guaranteed.
If any employers need help completing these forms or have questions, please feel free to contact us for assistance.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.