The Treasury and the IRS have issued temporary and proposed regulations to:
- reconcile advance payments of refundable employment tax credits provided under the Families First Coronavirus Response Act (Families First Act) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and
- recapture the benefit of the credits when necessary.
Under the Families First Act, many employers with fewer than 500 employees must provide paid leave to employees due to circumstances related to COVID-19. Certain employers must provide an employee with up to 80 hours of paid sick leave if the employee cannot work or telework due to specific reasons related to COVID-19. The Families First Act also amends the Family and Medical Leave Act of 1993 to require employers to provide expanded paid family and medical leave to employees who cannot work or telework for certain reasons related to COVID-19.
Eligible employers may receive a refundable payroll credit for required qualified sick leave wages or qualified family leave wages paid to an employee, plus allocable qualified health plan expenses.
The CARES Act provides an employee retention credit for certain employers who pay qualified wages to their employees and are experiencing economic hardship related to COVID-19. Employers eligible for the employee retention credit are those that carry on a trade or business during calendar year 2020 and tax-exempt organizations that either have a full or partial suspension of operations during any calendar quarter in 2020 due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or experience a significant decline in gross receipts during the calendar quarter. Qualified wages are those paid by an employer to some or all employees between March 13, 2020 and December 31, 2020, and include the employer’s qualified health plan expenses that are properly allocable to such wages or compensation. Qualified wages differ depending on whether the employer averaged 101 or more full-time employees during 2019, or 100 full-time employees or fewer during 2019. The employee retention credit is a fully refundable tax credit for employers equal to 50% of qualified wages; the maximum for an eligible employer for qualified wages paid to any employee is $5,000.
The same wages or compensation cannot be counted for both the Families First Act leave credits and the CARES Act employee retention credit.
Refundability of Credits
If the amount of the paid sick and family leave credits is more than the taxes imposed for any calendar quarter, the excess is treated as an overpayment that must be refunded. A similar refund is required for the employee retention credit.
The IRS has revised Form 941, Employer’s Quarterly Federal Tax Return, and is revising the other employment tax returns, so that employers can use these returns to claim the paid sick and family leave credits and the employee retention credit. The revised returns will provide for any credits in excess of the employment taxes imposed as described above, to be credited against other employment taxes and then for any remaining balance to be refunded to the employer.
Advance Payment of Credits and Erroneous Refunds
In anticipation of the paid sick and family leave credits, including any refundable portions, these credits may be advanced as provided by IRS forms and instructions, up to the total allowable amount and subject to applicable limits for the calendar quarter.
The IRS has created Form 7200, Advance Payment of Employer Credits Due To COVID-19, which employers can use to request an advance of the paid sick or family leave credits, the employee retention credit, or two or more of them. Employers must reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. A refund, a credit, or an advance of any portion of these credits to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund for which the IRS will seek repayment.
The temporary regulations provide that erroneous refunds of the credits are treated as underpayments of the taxes imposed under Internal Revenue Code (IRC) Section 3111(a) or 3221(a), and authorize the IRS to assess any portion of the credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were tax liabilities subject to assessment and administrative collection procedures. This allows the IRS to efficiently recover the amounts, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation. These procedures will apply in the normal course in processing employment tax returns that report advances in excess of claimed credits and in examining returns for excess claimed credits.
The temporary regulations also provide that employers against whom an erroneous refund of credits can be assessed as an underpayment include persons treated as the employer under IRC Section 3401(d), 3504, and 3511, consistent with their liability for the employment taxes against which the credit applied.
The temporary regulations apply to all paid leave credit refunds advanced or paid on or after April 1, 2020, and all employee retention credit refunds advanced or paid on or after March 13, 2020. Further, the temporary regulations apply to all paid leave credits (including any increases in the credits) refunded on or after April 1, 2020, including advanced refunds, as well as all employee retention credits that are refunded on or after March 13, 2020, including advanced refunds.
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