What is the mechanism for the payroll tax credit? Will there be a credit against tax deposits starting in April, or will employers need to wait until their second quarter tax return is filed in July?
Three refundable payroll tax credits were established by the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Response, and Economic Security (CARES) Act: the credit for providing qualified sick leave wages, the credit for providing qualified family leave wages, and the employee retention credit.
Form 7200, Advance Payment of Employer Credits Due to Covid-19, can be used to request advances of the portion of their combined amount of the three new refundable credits that would exceed their employment tax liability with respect to a quarter.
An employer can file Form 7200 multiple times for a quarter with respect to claiming refundable advances based on the amounts by which their total Covid-19 payroll tax credit amount so far accumulated for the quarter (equivalent to the sum of the amount of qualified sick and family leave wages paid, qualified health expenses based on the qualified leave wages, the employer portion of Medicare tax on the qualified leave wages, and the employee retention credit) exceeds the total of their employment tax liability (the employer and employee portions of Social Security and Medicare taxes, plus federal income tax withheld) so far accumulated for the quarter.
As an alternative to filing Form 7200, employers could forgo advances of the excess credit amounts and instead claim the refundable portions using Form 941 or another employment tax return applicable to the employer. Employers would not be required to use Form 7200 unless they want to acquire advance payments pertaining to the credits.
About 20 new data-entry fields are to be added to Form 941, Employer’s Quarterly Federal Tax Return, to accommodate additional reporting requirements established by the FFCRA and the CARES Act, which are to expand the length of the form to three pages, up from two.
The revised form is to be used starting with the second quarter of 2020 for reporting data related to the three new refundable payroll tax credits, amounts of employment taxes retained instead of deposited in anticipation of the credits, and amounts of the employer portion of Social Security tax deferred to 2021 and 2022. Filing of Form 941 for the first quarter was not to be changed.
Unlike the credit for providing qualified sick leave wages and the credit for providing qualified family leave wages, both of which apply to all of 2020 except the first quarter, relief via the employee retention credit and the ability to defer deposits of the employer portion of Social Security was available for part of the first quarter.
The employee retention credit may be taken based on qualified wages paid from March 13 to Dec. 31, 2020, and deferrals of the employer portion of Social Security tax are available with respect to deposit deadlines from March 27 to Dec. 31, 2020.
However, the revised Form 941 is not to be used for the first quarter. Data pertaining to the employee retention credit with respect to qualified wages paid from March 13 to Dec. 31, 2020, and data pertaining to deferrals of the employer portion of Social Security tax with respect to deposit deadlines from March 27 to Dec. 31, 2020, are to be reported using the second-quarter Form 941. The IRS is to release additional details on how employers are to complete reporting of the first-quarter data using the second-quarter Form 941.