Tax Credits, Form 7200, and Form 941 Changes
June 11, 2020 | Carol Henley
Deferral of Employer Paid Social Security Tax
All employers may defer the employer portion of Social Security tax. This deferral applies to wages paid between 3-27-20 and 12-31-20. If your tax payment has been made, then deferral is not available for that pay period or for prior payroll periods where payroll taxes have already been paid. Since this is a deferral and not forgiven, if an employer elects to defer the employer’s portion of Social Security tax, payment of half the total deferred taxes is due 12-31-21, and payment for the remainder of total deferred taxes is due 12-31-22. You will still owe the tax, but do you want to pay now or defer?
If a business received a PPP loan, special consideration must be given to the available deferral period. On the date the lender acknowledges loan forgiveness, the employer may no longer defer the employer portion of Social Security tax. For example, an employer defers his portion of Social Security tax beginning 3-27-20. The employer receives a PPP loan on 4-14-20. The 8-week forgiveness period ends 6-9-20. The employer turns in the PPP backup documentation required by the lender (rent/mortgage interest payments, utility payments, and payrolls). The lender approves forgiveness on 7-6-20. The employer may defer his portion of Social Security tax for payrolls paid from 3-27-20 to 7-5-20.
Deferral of the employer portion of Social Security tax can be combined with tax credits for mandatory sick/family/medical leave and employee retention.
Employee Retention Credit (ERC)
Employee Retention Credit (ERC) is available to employers who qualify and did not receive a PPP loan. They qualify in one of two ways. The first qualification is due to a full or partial suspension of their business operations because of government orders. Examples include restaurants who were closed to dine-in options but could still serve curbside, and schools, gyms, and salons that were totally shutdown by government order.
If your business was not shut down or partially shutdown by government order, you would not qualify under this option. You only qualify while the government order is in place. If the government order shut down gyms from April 1st to May 31st and the gym did not get a PPP loan, the gym would be eligible for the employee retention credit only during the period they were closed by government order. If your business operates in multiple locations and one location is shut down or partially shut down, your entire business may qualify.
The second way a business may qualify for the employee retention credit is to show a significant decline in gross receipts. What is a significant decline? Quarterly gross receipts must be less than 50% of 2019’s gross receipts for the same calendar quarter. If this qualification is met, the credit continues each quarter as long as receipts remain below 80% of 2019’s same quarter.
Example: First quarter 2020 gross receipts were $125,000. Gross receipts for first quarter 2019 were $275,000. They meet the gross receipts test for first quarter 2020 (275,000 x 50% = 137,500.) In second quarter 2020, gross receipts were $192,500. In second quarter 2019, gross receipts were $280,000. The employer still qualifies in second quarter 2020 because second quarter gross receipts are less than 80% of second quarter 2019 ($280,000 x 80% = $224,000.)
What is the employee retention credit? It is a tax credit of 50% of wages paid to employees, up to $10,000 per employee, through December 31, 2020. However, if your business has 100 or more employees, only the wages paid to employees receiving pay but not working can be used in the credit calculation. ERC applies to qualifying wages paid from March 13, 2020 to December 31, 2020.
The ERC does not apply to self-employed individuals.
Credit for Mandatory Sick Leave, Family and Medical Leave under FFCRA
Employers with less than 500 employees are required to provide emergency paid sick leave, emergency paid family leave, and emergency paid medical leave under the Families First Coronavirus Response Act (FFCRA). Employers may receive credit for these wages paid, up to the maximums described below. Governmental entities are not eligible for these credits.
The credit applies to qualifying wages beginning April 1, 2020 to December 31, 2020 and is available for most employers with less than 500 employees that pay qualified sick leave wages and qualified family/medical leave wages to their employees as required by the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act. Wages used to calculate credits for mandatory sick leave, family leave, or medical leave may not be counted as wages for purposes of calculating the Employee Retention Credit (ERC) or for the PPP Loan Forgiveness calculation.
Generally, the Act provides that employees of covered employers are eligible for:
1. Two weeks (up to 80 hours) of paid sick leave, at the employee’s regular rate of pay where the employee is unable to work because the employee is quarantined (pursuant to Federal, State or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis up to a maximum of $5,110 or $511/day.
2. Two weeks (up to 80 hours) of paid sick leave, at two-thirds the employee’s regular rate of pay because the employee is unable to work because of a bona fide need to care for an individual subject to quarantine (pursuant to Federal, State or local government order or advice of a health care provider) or to care for a child (under 18 years of age) whose school or child care provider is closed or unavailable for reasons related to COVID-19, and/or the employee is experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of the Treasury and Labor, up to $2,000 or $200/day.
3. Up to an additional 10 weeks of paid extended family and medical leave at two-thirds the employee’s regular rate of pay where an employee, who has been employed for at least 30 calendar days, is unable to work due to a bona fide need for leave to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19, up to $10,000 or $200/day.
An employee can substitute the first two weeks of unpaid leave under Option 3 with PTO or the leave pay under Option 1 or 2.
Businesses with fewer than 50 employees are not required to pay sick leave, family leave, or medical leave related to COVID-19 if doing so would “jeopardize the business’s ability to continue.” If you believe your business qualifies, you will need to provide documentation to substantiate your exclusion.
Credit can also be given for qualified health plan expenses allocated to qualified leave wages, the employer’s share of Medicare taxes on the qualified leave wages, and if the employer offers sick pay as an employment benefit, those wages are also eligible for consideration in calculation of the credit(s).
Form 7200 is a new form used to request an advance payment of qualifying tax credits. These credits will be reported on your quarterly payroll tax report, Form 941. Employers may file Form 7200 as often as every payroll or not at all. Form 7200 is used when you want an advance on these credits, not when the net of payroll taxes due minus credits leave a remaining amount due to IRS. Calculate payroll taxes, deduct payroll tax payments, and deduct qualifying tax credits. If the result is a credit, you may file form 7200 to receive your refund in advance or may claim your refund on Form 941. You are not required to file Form 7200. Form 7200 is due no later than the quarterly due date for Form 941.
The IRS is accepting Form 7200 by fax, no paper mailings. If you use a payroll processor, IRS will allow the payroll processor to fax Form 7200 to IRS if you have or previously have authorized your payroll provider using form 8655 Reporting Agent Authorization. All employers who want their payroll processor to sign and file Form 7200 must provide a written authorization specifically requesting the payroll provider file and sign Form 7200. This can be done by mail, email, or fax. Keep a copy for your records.
Examples: If an employer is entitled to a credit of $5,000 for qualified sick leave wages and their payroll tax deposit for that pay period for all employees is $8,000, the employer would only required to deposit $3,000 on its next regular deposit date, generally 3 business days after pay date. If an employer is entitled to ERC and paid leave credits of $10,000 and the payroll tax liability for that pay date is $8,000 in payroll taxes on all employees, the employer could file Form 7200 a claim the refundable credit of $2,000 ($8,000 in payroll taxes minus $10,000 in credits). If the employer does not file Form 7200 to claim the credits each payroll, these credits may be refunded on Form 941 if the net of payroll taxes due minus payments made, and minus credits due result in a credit. All credits are refunded by check. Direct deposit is not an option. No timeframe has been provided for mail-time of refund(s).
Form 941 Changes
Form 941 is now 3 pages and a draft has been published with a final release expected shortly. See link below to draft copy of Form 941. On Pages 1 and 2 of Form 941, revisions include qualified sick/family/medical leave wages, reporting of nonrefundable portion of credit for qualified sick/family/medical leave and ERC wages, deferred amount of employer share of social security tax, refundable portion of credit for qualified sick/family/medical leave and ERC wages, and total advances received from filing Form(s) 7200 for the quarter.
Page three of Form 941 asks for additional information regarding qualified health plan expenses allocable to qualified sick/family leave wages, qualified wages for ERC and health plan expenses allocable to ERC wages. Document your calculations for credits and keep copies of completed Form(s) 7200.