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Utilization of Form 7200 for Advance Payment of COVID-19 Employer Credits

In response to the COVID-19 pandemic, the Families First Coronavirus Response Act (FFCRA) was signed by President Trump on March 18, 2020. FFCRA benefits went into effect on April 1, 2020 and expires on December 31, 2020. You can read more about the benefits under FFCRA in a previous BP Blast.

To provide further COVID-19 relief, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. You can read more about the Tax Implication of the CARES Act here, and the aid relief and loan provisions here.

Recent Department of Labor guidance provided that governmental shelter in place, stay at home, or other orders that limit the employee’s mobility may count as a quarantine or isolation order under FFCRA. The DOL also clarified that employees subject to such an order may not take paid sick leave “where the employer does not have work for the employee.” For example, if a bakery closes temporarily due to downturn in business. An employee subject to a shelter-in-place order would not be eligible for paid sick leave because their inability to work is not due to the need to comply with the stay at home order, but due to closure of the bakery. However, the employee may qualify for state unemployment insurance.

On March 31, 2020, the IRS issued Form 7200, Advance Payment of Employer Credits Due to Covid-19, and instructions for employers to use to obtain advanced payments of three tax credits that were enacted to help businesses dealing with the COVID-19 pandemic.

The new Form 7200 can be used to claim advanced payment of the following employer credits:

  1. The qualified family leave credit.
  2. The qualified sick leave credit, and
  3. The employee retention credit.

Under IRS guidance, employers that are eligible for the credits may retain Federal income tax withheld and both employer and employee social security and Medicare taxes instead of paying these amounts to the IRS. If the available tax credits exceed retained amounts, employer can file Form 7200 for advance payment of the tax credits.

Example 1:

An Eligible Employer paid $5,000 in qualified sick leave wages and qualified family leave wages (and allocable health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter as the $5,000 in qualified leave wages.  The Eligible Employer may keep up to $5,000 of the $8,000 of taxes the Eligible Employer was going to deposit, and it will not owe a penalty for keeping the $5,000.  The Eligible Employer is then only required to deposit the remaining $3,000 on its required deposit date. The Eligible Employer will later account for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Example 2: Same facts as above, except the eligible employer is only required to deposit $3,000 in federal employment taxes. In this case, the qualified employer can keep the entire $3,000 taxes, and may request an advance payment of the credit on the remaining $2,000 by completing Form 7200.

According to the IRS, employers can file Form 7200 for advance credits anticipated for a quarter at any time before the end of the month following the quarter in which the employer paid the qualified wages, and are permitted to file Form 7200 several times during each quarter to request an advance payment of the tax credits. From 7200 should not be filed to request advance payment of credit that the employer has already claimed on its employment tax deposits.

Self-employed individuals are not eligible for advanced credits, and therefore, Form 7200 cannot be used by self-employed individuals. The refundable credits are claimed on the self-employed individual’s Form 1040, U.S. Individual Income Tax Return, for the 2020 tax year.

Credit limitations apply, including:

  1. Employer retention credit is not allowed for business that receives a Payroll Protection Credit loan.
  2. Same wage payments cannot be used for both the paid family and sick leave credit and the employee retention credit.

We recommend you work with your payroll provider to set-up codes for tracking of credit eligible wages.

Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of COVID-19 legislation that impacts you and your business.


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