The IRS has issued Notice 2020-22 (see https://www.irs.gov/pub/irs-drop/n-20-22.pdf) to provide further guidance to employers seeking to obtain the relief of the refundable tax credits provided in both (i) the Families First Coronavirus Response Act (the “Families First Act”) and (ii) the CARES Act.
Families First Act Credits.
The Families First Act provides that employers may receive a refundable tax credit against such employer’s share of quarterly (i) social security and medicare taxes (or, if applicable, Railroad Retirement Act taxes) based on 100% of qualified sick leave wages and qualified family leave wages plus (ii) qualified health plan expenses (see https://www.butlersnow.com/2020/03/employer-payroll-tax-credits-under-the-families-first-coronavirus-response-act/)
CARES Act Retention Credits.
The CARES Act provides for a refundable tax credit of up to 50% of the “Qualified Retention Wages” paid from March 13, 2020 through December 31, 2020, with a cap of $10,000 of wages paid per employee. (see https://www.butlersnow.com/2020/04/important-tax-provisions-in-the-cares-act/)
Meaning of “Refundable” Credits.
The credits are termed “refundable” because the excess of the tax credit over the amount of otherwise due employment taxes is deemed an overpayment. The employer is entitled to a refund of this overpayment, hence the term “refundable.” Since the employee retention credits may not be claimed by an employer that has received a payroll protection loan (a “PPP Loan”) under the CARES Act (i.e., the benefits are mutually exclusive), these credits generally have not received as much publicity as the PPP loans. Nevertheless, the employee retention credits are still potentially very valuable, especially for those employers that do not qualify for a PPP Loan.
Obtaining the Refundable Credits.
There are two alternatives for an employer to receive the benefit of these employment tax credits. First, the IRS has issued a draft of Form 7200, Advance Payment of Employer Credits Due to COVID-19. Form 7200 allows employers to file and receive advanced payment of the estimated amount of excess tax credits, if the amount of expected tax credits is greater than the amount of employment tax deposits otherwise due for that quarter. Accordingly, the employer can file in advance and receive an advance payment of the overpayment.
The second alternative is for employers to take a credit each quarter when they file Form 941, Employer’s Quarterly Federal Tax Return. By taking a credit on the Form 941, the employers effectively reduce the amount of the applicable deposit with the IRS (and by reducing their deposit, an employer has received the credit). Notice 2020-22 further provides that employers are not subject to the penalty for failing to timely deposit employment taxes under Code Section 6656 if (i) the amount of employment taxes that are not deposited (i.e., the deemed credit amount) is less than or equal to (ii) the employer’s anticipated credits and (iii) the employer did for previously file for advance payment of the credits.