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.
The Families First Coronavirus Response Act (FFCRA) Tax Credit (FFCRA) requires certain employers to pay emergency sick leave and emergency leave under the Family Medical Leave Act (FMLA).
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.
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.
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:
Employment taxes on $70,000 regular wages:
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.
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.
Employers can increase the FFCRA tax credit for qualified healthcare 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.
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 that the employer is entitled to the tax credit.
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.
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.
Savvy business owners are planning their cash flow models knowing how these credits intersect and interact to maximize cash flow, all designed to ensure the company is able to be in the best position possible when the economy reopens.
Please note that this discussion is general in nature, and not intended to be tax advice. Please consult with a CPA to get answers to your specific fact pattern. Chastity Wilson from CLA assisted with this article. Follow me on Facebook to receive updates on current developments.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. Reach him for comment at mike.bosma@claconnect.com.
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