Coronavirus Response Results in Payroll Changes

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.

Does IRS Notice 2020-17 regarding the coronavirus affect weekly depositors?

IRS Notice 2020-17 only affects individual income tax payable by individuals outside the context of withholding and corporate income tax (i.e., income tax directly payable by businesses).

Additionally, the notice affects only payments of federal income tax and not Social Security tax or Medicare tax, so even if the notice covered federal income tax, Social Security and Medicare tax deposits still would need to occur without delay.

On the payroll tax credit portion, is it going to be handled in the same manner as FMLA credits in the past, using Form 8994?

Form 8994 is not used for claiming the credits for qualified sick leave wages and qualified family leave wages required to be paid under the Families First Coronavirus Response Act (FFCRA). Advances for these two new credits can be requested using the new Form 7200 and data regarding the credits is reported starting with the second quarter of 2020 using Form 941.

Information regarding a different credit that existed before the enactment of the FFCRA, the employer credit for paid family and medical leave that is available through I.R.C. Section 45S, is reported using Form 8994.

For employees now working remotely because of the coronavirus, does this change how we determine which state we pay unemployment insurance to?

The general method for determining which state or other jurisdiction has unemployment taxation authority over an employee’s compensation was not changed by the federal government, state governments, the government of the District of Columbia, or the governments of Puerto Rico and the U.S. Virgin Islands in response to the coronavirus outbreak.

A four-step localization test is used to determine the jurisdiction for which an employee’s work is attributable, and that jurisdiction has unemployment taxation authority over compensation paid to that employee.

Step 1. Determine whether the employee works primarily in one jurisdiction and works in other jurisdictions only incidentally, such as on a temporary basis. If so, the employee’s unemployment-taxable wages are considered to have been received for work attributable to the only or primary jurisdiction in which the employee performed work.

Step 2. If there is no single jurisdiction in which all or the primary portion of the employee’s work is performed, determine whether the employee performs at least some work in the jurisdiction in which the employee’s base of operations is located. For the purpose of the localization test, the base of operations is the place of a relatively permanent nature from which the employee commonly begins a workday and then returns at the end of the workday to receive information or further tasks, acquire or repair equipment, or perform other end-of-workday functions. The base of operations is not necessarily the same as the location from which the employee’s work is directed or controlled. If the employee does perform work in the same jurisdiction as the employee’s base of operations, the employee’s unemployment-taxable wages are considered to have been received for work attributable to that jurisdiction.

Step 3. If no jurisdiction is identified as applicable under the second step, determine whether the employee performs at least some work in the jurisdiction from which the employee’s work is directed or controlled. If the employee does perform work in the jurisdiction from which the employee’s work is directed or controlled, the employee’s unemployment-taxable wages are considered to have been received for work attributable to that jurisdiction.

Step 4. If no jurisdiction is identified as applicable under the third step, determine whether the employee performs at least some work in the jurisdiction in which the employee lives or maintains a place of residence. If the employee lives and works in the same jurisdiction, the employee’s unemployment-taxable wages are considered to have been received for work attributable to that jurisdiction.

If all four tests are applied for an employee’s work and no jurisdiction qualifies, most jurisdictions’ laws enable employers to elect to attribute the employee’s work to one jurisdiction.

Which employers are eligible to receive a Paycheck Protection Program loan?

When the PPP application window is open, qualifying employers can acquire a forgivable loan to cover payroll costs they incurred for an eight-week period within the span from Feb. 15 to June 30, 2020, under the CARES Act’s Paycheck Protection Program (PPP), which is administered by the Small Business Administration. The eight-week period would start with the origination date of the forgivable loan.

The forgivable loan generally is available for employers with up to 500 employees.

However, if the Small Business Administration determines that an employer operates in an industry for which the standard number of employees that a small business in that industry would have is more than 500, the employer would be eligible for the forgivable loan if it has up to that number of employees.

Employers with multiple locations and that are in the accommodation and food-services sector, i.e., those in North American Industry Classification System Code 72, also may be eligible for a forgivable loan if at each of their locations they have no more than 500 employees.

What costs can be covered by a Paycheck Protection Program loan, and which costs cannot be covered by such a loan?

Eligible payroll costs that may be covered by the forgivable loan include the amounts of salaries, wages, commissions, or similar compensation; payments of cash tips or equivalents of such tips; payments for vacation, parental, family, medical, or sick leave; allowances for dismissals or separations from employment; payments, such as insurance premiums, that are required for providing group health care benefits, including the continuation of such benefits during periods of paid family, medical, or sick leave; retirement benefit payments; and payments of state taxes or local taxes assessed on compensation paid to employees.

The forgivable loan cannot cover:

• The amount of compensation paid to an employee “in excess of an annual salary of $100,000, as prorated” for the period from Feb. 15 to June 30.
• The costs of Social Security and Medicare taxes, i.e., taxes imposed by Internal Revenue Code Chapter 21.
• The costs of taxes assessed under the Railroad Retirement Tax Act, i.e., taxes imposed by I.R.C. Chapter 22.
• Amounts of federal income tax required to be deducted at source from employment income paid to employees, i.e., federal income tax required to be deducted under I.R.C. Chapter 24.
• Compensation paid to employees who have a principal place of residence outside the U.S.
• Costs of qualified sick leave wages and qualified family leave wages.

The forgivable loan, in addition to covering payroll costs, also in general can cover payments of interest on a mortgage obligation, rent, costs of utilities, and interest on any other debt obligations that were incurred before Feb. 15. All of these elements are eligible for forgiveness, except the interest on any other debt obligations that were incurred before Feb. 15.

However, as a requirement of acquiring the loan, and for the loan principal to be fully forgivable, at least 75% of the loan proceeds, i.e., the amount of the loan given to a borrowing employer by a lender, generally must be used for payroll costs.