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IRS Form 941 Draft Issued for Claiming Payroll Credits & Revisiting the Employee Retention Credit

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With so much attention on the Paycheck Protection Program (PPP) it is also important to look at payroll credits that can also help employers mitigate the implications of the pandemic. These credits include: the Employer Retention Credit, the FMLA benefit for employers’ supporting employees dealing with COVID-19 implications at home, and the deferral of the employer portion of payroll taxes (6.2%). In a recent FAQ, the Treasury Department clarified that an entity that took out a PPP loan and plans to return the funds by May 18th because they determined that they cannot “certify the need” will be allowed to take the Employee Retention Credit.

The IRS recently released a draft of the updated 2nd Quarter 2020 Form 941 for employers to claim available credits on the 2nd quarter filings. The draft shows it will be important to track the wages and taxes related to each credit in order to properly report them on Form 941. The legislation has also given taxpayers the opportunity to defer the employer portion of payroll taxes. Click here for a copy of the draft 941 for claiming the various payroll tax credits beginning Q2 2020.

Employee Retention Credit (ERC) Summary

Who is eligible?

An eligible employer (including non-profits) for the ERC credit can employ an average of 100 or fewer full-time employees in 2019.

Employers are eligible for the credit if they fully or partially suspend operations during any calendar quarter due to COVID-19 or if they experience a significant decline in gross receipts during the calendar quarter.

Larger employers may also be eligible. Companies with over 100 full time employees (on average) will be eligible for the credit related to wages of employees who are furloughed or working reduced hours because of a significant decline in gross receipts related to COVID-19 as explained below.

What is a significant decline in gross receipts?

Significance is determined by comparing the receipts of any quarter in 2020 to the comparable quarter 2019 receipts and if it is less than 50% of the prior year amounts, this qualifies as a significant decline. Once the company’s gross receipts have returned to within 80% of the prior year receipts for the same quarter, the employer is no longer eligible for the Employee Retention Credit.

How much credit can be taken?

  • This is a fully refundable tax credit for employers of up to 50% of qualified wages paid to employees (including qualified health plans expenses allocable to the employee).
  • The wages must be paid between March 13 and December 31, 2020.
  • The maximum eligible wages are $10,000 per employee, which means the maximum per employee credit is $5,000 for 2020.
  • A recent Treasury clarification stated that if an employer is paying health insurance costs for a furloughed worker, then those costs are eligible for the ERC.

How does this affect the employee?

It does not affect employees. The employee wages are still subject to withholding of federal income tax and the employees’ share of social security and Medicare taxes.

How is this credit claimed on Form 941?

Based on the draft Form 941 issued on April 30, 2020 and linked above, this will be calculated on the new worksheet 1 that will need to be attached to any 941 using payroll tax related credits. These are reported separately from the Sick/Family leave credits and it is important to separately calculate any credits related to this provision. This worksheet includes a calculation of the refundable/non-refundable portion of the credit. See Worksheet 1 here.

  • The credits are first used to offset the employer’s payroll tax withholdings.
  • If the Eligible Employer is entitled to a credit greater than their employer portion of social security taxes on all wages, then any excess can offset any remaining tax liability on the employment tax return, and any additional balance will be a refundable overpayment on the 941 or via the 7200 advanced payment request described in more detail below.

Can this credit be taken in conjunction with the other credits and benefits available from COVID-19 related legislation?

If a PPP loan is received by the taxpayer, then they cannot use the Employee Retention Credit. If the employer utilizes the Sick/Family Leave Credit, they can still use the Retention Credit but not on the same wages.

Review of Other Payroll Related Credits

  1. Sick/Family Leave Credit is Available to Private Employers with Fewer than 500 Employees

This credit has been available since the first legislation related to COVID-19 was released (see our previous blast on this topic), but there is finally some clarification as to how it will need to be reported on Form 941. The two groups of employee benefits for Sick or Family Leave will be separately stated on Form 941. It is important to track these for proper reporting.

The maximum credit related to an individual employee is $10,000 no matter which of the two qualifying groups the employee falls into and is not subject to the employer’s share of FICA payroll taxes (6.2%). These are tax deductible expenses for the employer to pay sick/family leave wages.

The best part about this credit – it can be used in conjunction with PPP loans or the Employee Retention Credit. However, if wages are utilized for this credit, they can’t be used for PPP forgiveness calculations.

  1. Deferral of Employer Portion of Payroll Taxes through the end of 2020

This provision is not receiving as much publicity as the previous two credits, but it is a powerful strategy to help employers mitigate current cash flow shortfalls. The provision allows the employer to defer payment of employer portion of payroll taxes. Half of these deferred taxes would be due on December 31, 2021 and half due by December 31, 2022. Using this provision depends on whether you want to “kick the can down the road.” It’s not a forgivable subsidy in the way the PPP loan can be if the employer receives forgiveness under that portion of the CARES Act, but it is an interest-free loan from the Treasury with short-term cash-flow benefits and intermediate-term working capital benefits as well. The deferral of payroll taxes can be used until PPP loan forgiveness is accepted (if applicable).

The deferral of employer portion of social security taxes are disclosed on page 2 of the 941 draft form and were previously outlined in detail in this BP blast.

  1. Advance Payments of Intended Refunds via form 7200

Form 7200 should be used if you have a credit greater than your entire amount of payroll taxes due for the quarter. If the employment taxes deposits are already adjusted for the credits, then do not request a refund on the 7200.

The IRS granted authority to request advanced payments for credits to eligible employers and to waive penalties related to delayed deposits of payroll taxes because of anticipated receipt of credits.

Berntson Porter is here to help you navigate these unprecedented times. Visit our online Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.