United States: COVID-19: Federal Tax Relief And Refundable Employment Tax Credits

As the United States continues to confront the COVID-19 pandemic, the U.S. government has authorized various federal tax-related measures to assist individuals and businesses weather the financial hardships spawned by this national emergency, including:

• As part of the nationwide emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, the President instructed the Secretary of the Treasury to provide relief from federal tax deadlines with respect to taxpayers who have been adversely affected by the COVID-19 (Affected Taxpayers).
• The President signed into law the Families First Coronavirus Response Act (the FFCRA), which requires employers with less than 500 employees to provide paid sick leave and expanded family & medical leave (qualified leave) in connection with the COVID-19 pandemic. In order to facilitate the ability of covered employers to provide qualified leave as required by the FFCRA, covered employers are entitled to a 100 percent refundable tax credit, which will allow covered employers to receive full reimbursement for qualified leave regardless of their actual tax liability.
• The IRS has unveiled a new COVID-19 People First Initiative effort to temporarily adjust and/or suspend key compliance programs. This initiative is intended to assist taxpayers by providing relief on a variety of issues, ranging from easing payment guidelines to postponing compliance actions.
• The President signed into law the Coronavirus Aid, Relief and Economic Security (CARES Act) which, in addition to providing for direct payments to individuals and families, authorizes a 50 percent employee retention payroll tax credit for wages paid to employees during the COVID-19 emergency, and allows employers to delay the payment of certain 2020 payroll taxes until 2021 and 2022.

Extended Filing and Payment Deadline

Has the IRS extended the April 15 federal income tax filing and payment deadline?

Yes. The IRS has automatically extended both the deadline to file federal income tax returns and make federal income tax payments (including payments of tax on self-employment income) that would otherwise be due on April 15, 2020 to July 15, 2020.¹

Who is eligible for this extension?

This extension applies to any person with a federal income tax return due on April 15, 2020. For this purpose, a person includes an individual, trust, estate, partnerships, association, corporation and unincorporated business entity (Taxpayers). There is no need to file an extension of time to file (Form 4868 or Form 7004) to receive this relief and no limit on the amount of payment that may be postponed.² Taxpayers who have filing or payment due dates other than April 15 have not been granted relief at this time. However:

• E-Filing Recommended for Refunds - Taxpayers who are due a refund should not delay filing their federal income returns. The IRS also recommends that taxpayers file electronically and use direct deposit to speed up processing of returns and the issuance of refunds.
• Additional Time Needed? Taxpayers who need additional time to file beyond July 15, 2020 will need to file an extension.

Does this automatic extension apply to estimated tax payments relating to 2020 income?

Yes. The automatic extension also applies to federal estimated income tax payments (including payments of tax on self-employment income) due on April 15, 2020 by an Affected Taxpayer. Second quarter 2020 estimated income tax payments are still due on June 15, 2020.

Will interest or penalties be imposed on the delayed payment of income or self-employment tax?

No. The period beginning on April 15, 2020 and ending on July 15, 2020 will be disregarded in the calculation of any interest, penalty or addition to tax for failure to file federal income tax returns or to the payment of postponed federal income taxes. Interest, penalties and additions to tax with respect to such postponed Federal income tax filings and payments will begin to accrue on July 16, 2020.

Should non-filers take action to file outstanding returns for prior years?

Yes. The IRS is encouraging individual taxpayers with outstanding tax filing obligations for 2018 or 2019 to file their tax return as soon as possible, and include direct deposit banking information, in order to ensure prompt receipt of their economic impact payments. Social Security beneficiaries, however, will automatically receive their economic impact payments in the same manner as they currently receive their Social Security benefits (i.e., by direct deposit or by check).

Does the extension apply to taxes other than federal income taxes?

Yes. The deadline to file federal gift and generation-skipping transfer tax returns (Form 709) and to make federal gift and generation-skipping transfer tax payments otherwise due on April 15, 2020 has also been automatically extended to July 15, 2020. There is no need to file an extension of time to file (Form 8892) to receive this relief and no limit on the amount of payment that may be postponed. Affected Taxpayers who need additional time to file beyond July 15, 2020 will need to file an extension.

Similar to the rules governing income taxes, the period beginning on April 15, 2020 and ending on July 15, 2020 will be disregarded in the calculation of any interest, penalty or addition to tax for failure to file a Form 709 or pay federal gift and generation-skipping transfer taxes. Interest, penalties and additions to tax with respect to any such postponed Form 709 and payments due thereunder will begin to accrue on July 16, 2020.

Does this relief provide individuals more time to contribute to their IRAs, HSAs or Archer MSAs for 2019?

Yes. Because the due date for filing federal income tax returns is now July 15, 2020, individuals may make contributions to their IRAs, HSAs or Archer MSAs for 2019 at any time up to July 15, 2020.

COVID-19 People First Initiative

What is the IRS's People First Initiative?

The IRS' newly announced People First Initiative is intended to provide immediate relief to help taxpayers facing uncertainty over taxes, including taxes that are owed under existing installment agreements. Under the initiative, the IRS will generally not start new examinations except in situations in which the government's interest could be affected by applicable statute of limitations. With respect to existing compliance activities and examinations, the IRS is encouraging taxpayers to respond to IRS requests for additional information, although all in-person meetings will be suspended and examinations will proceed remotely (if possible).

Has the IRS suspended payments due under existing Installment Agreements and Offers-in-Compromise?

Yes. For taxpayers under an existing Installment Agreement, payments due between April 1, 2020 and July 15, 2020 are suspended. Taxpayers who are currently unable to comply with the terms of an Installment Payment Agreement, including a Direct Deposit Installment Agreement, may suspend payments during this period. The IRS will not default any Installment Agreements during this period, but interest will continue to accrue on any unpaid balances as required by applicable law. Additionally, the IRS has indicated that taxpayers have the option of suspending all payments on accepted Offers-in-Compromise until July 15, 2020, although interest will continue to accrue on any unpaid balances.

Tax Credits Under The Families First Coronavirus Response Act (FFCRA)

The FFCRA requires employers with less than 500 employees to provide paid sick leave and expanded family & medical leave to employees unable to work or telework due to certain COVID-19 related circumstances. In order to facilitate the ability of covered employers to provide paid leave, the FFCRA provides for a refundable tax credit equal to 100 percent of the qualified sick leave wages and qualified family leave wages required to be paid under the FFCRA regardless of their actual tax liability. The following questions and answers are focused principally on the refundable tax credit available to private sector employers under the FFCRA.

For additional information regarding who is eligible for qualified leave and the dollar amount of qualified leave employers are required to pay, please refer our prior FAQ.

What is the effective date of the FFCRA?

The FFCRA's paid leave provisions are effective on April 1, 2020, and apply to leave taken between April 1, 2020 and December 31, 2020.

Are qualified sick leave wages and qualified family leave wages taxable?

Yes. The FFCRA does not distinguish qualified leave wages from other wages an employee may receive. Accordingly, qualified leave wages are subject to withholding of federal income tax, the Social Security tax (employee's share only) and Medicare taxes. Qualified leave wages are also considered wages for purposes of other benefits that the employer may provide, including for purposes of making salary reduction contributions to the employer's group health plan or 401(k) plan (subject to the terms of such plans). Employers are not required to withhold and remit the employer's 6.2 percent share of Social Security taxes on qualified leave wages, but such wages remain subject to the employer's 1.45 percent Medicare tax.

How do you determine if your business is under the 500-employee threshold?

For most private sector employers, determining whether you fall under the 500-employee threshold will likely not be an issue. With respect to mid-size businesses, and employers who are owned by (or affiliated with) other entities, the determination is less clear. To this end, the DOL has indicated:

• Single employer - A corporation (including its separate establishments or divisions) is typically considered to be a single employer and its employees must each be counted toward the 500-employee threshold.
• Separate employer - Two or more entities are typically treated as separate employers unless they meet the "integrated employer test" under the Family and Medical Leave Act (FMLA). If two entities are an integrated employer under the FMLA, then employees of all entities making up the integrated employer will be counted in determining employer coverage for purposes of the FFCRA. Existing regulations indicate that a determination as to whether separate entities are an integrated employer is not determined by the application of any single criterion, but rather the entire relationship is to be reviewed in its totality.³ Factors to be considered in determining if separate businesses are an integrated employer include:
  • Common management;
  • Interrelation between operations;
  • Centralized control of labor relations; and
  • Degree of common ownership or financial control.
• Joint Employer - If two entities are found to be "joint employers" under the Fair Labor Standards Act with respect to certain employees, all of their common employees must be counted in determining whether Qualified Leave must be provided.

What is the "refundable payroll credit" for qualified sick leave wages and qualified family leave wages?

Private sector employers, including tax-exempt organizations,that provide paid sick leave and expanded family and medical leave required by the FFCRA are eligible for reimbursement of the costs of that leave through refundable tax credits. The FFCRA provides for a refundable credit equal to 100 percent of the "qualified sick leave wages" and "qualified family leave wages" paid by an employer with respect to leave taken between April 1, 2020 and December 31, 2020. The credit is allowed against employer's share of the 6.2 percent Social Security tax imposed on all wages and compensation paid to all employees. If the amount of the credit exceeds the amount of such taxes, the excess is treated as an overpayment refundable to the employer.

For purposes of the credit, qualified wages means §3121(a) wages (i.e., wages subject to employment taxes) paid by the employer to an eligible employee as required by the FFCRA, increased by the amount of "qualified health plan expenses" properly allocable to, and the employer's share of Medicare tax on, such wages. For this purpose, "qualified health plan expenses" means amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent that such amounts are excluded from the gross income of employees (by reason of §106(a) of such Code). Qualified health plan expenses are properly allocated to qualified wages if the allocation is made on a pro rata basis among covered employees (for example, based on the average premium for all employees covered by the policy) and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate). The amount of qualified health plan expenses taken into account in determining the credit includes both the portion of the cost paid by the eligible employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions (but not amounts that an employee paid for with after-tax contributions). The amount of qualified health plan expenses does not include employer contributions to HSAs (including individual coverage HSAs), but employers may include contributions to HRAs (other than QSEHRA) or health FSAs.

How does an employer claim the refundable payroll credit?

In order to facilitate prompt recovery of the credit, the IRS has stated that eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit the taxes with the IRS. The federal employment taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees. If the federal employment taxes to be deposited are not sufficient to cover the eligible employer's cost of the qualified wages (including the allocable qualified health plan expenses and employer Medicare tax on such wages), the employer can request an advance of the credit from the IRS using Form 7200, Advance Payment of Employer Credits Due to COVID-19.⁴

Are refundable tax credits required to be included in gross income?

Yes, but employers receive a corresponding tax deduction. To prevent a double tax benefit, employers who receive the credit must include the full amount of the credit (including the allocable qualified health plan expenses and employer Medicare tax on such wages) in gross income. Employers, however, will be able to offset such income by deducting the amount of qualified wages (and any allocable qualified health plan expenses and employer Medicare tax) in the taxable year such expenses are paid or incurred.

If I want to pay my employees more than they are entitled to receive for paid sick leave or expanded family and medical leave, can I do so and claim a tax credit for the entire amount paid to them?

You may pay your employees in excess of the FFCRA requirements. But you cannot claim, and will not receive tax credit for, those amounts in excess of the FFCRA's statutory limits.

For more information on the refundable payroll credit, seeFAQs: COVID-19-Related Tax Credits for Required Paid Leave

Coronavirus Aid, Relief, and Economic Security (CARES Act)

What is the Employee Retention Credit?

Section 2301 of the CARES Act provides for a refundable payroll tax credit equal to 50 percent of the qualified wages (including allocable qualified health plan expenses) paid during a calendar quarter by employers to employees during the COVID-19 emergency. The credit is available to employers whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order (i.e., due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings), or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year (beginning with calendar quarter starting January 1, 2020).

The credit is based on "qualified wages" paid to the employee. For eligible employers with greater than 100 full-time employees,⁵ qualified wages are wages paid to employees for time that the employee is not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The term "qualified wages" also includes an allocation of the employers "qualified health plan expenses," but it does not include the amount of qualified sick and family leave wages for which the employer received a tax credit under the FFCRA.

The credit is provided for the first $10,000 of compensation paid to an eligible employee, including qualified health plan expenses allocable to such wages. The credit ceases when qualified wages exceed $10,000 per employee. Accordingly, the maximum credit per employee then is $5,000 (50 percent of $10,000). The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

In anticipation of receiving the credit, eligible employers can fund qualified wages by accessing federal employment taxes, including withheld income, Social Security and Medicare taxes that are required to be deposited with the IRS. If the federal employment taxes to be deposited are not sufficient to cover the credit, the employer can request an advance of the credit from the IRS using Form 7200, Advance Payment of Employer Credits Due to COVID-19.⁶

Aggregation Rule - All persons treated as a single employer under subsection (a) or (b) of section 52 of the Internal Revenue Code of 1986, or subsection (m) or (o) of section 414 of such Code, shall be treated as one employer for purposes of Section 2301. Note: This is not the same test as used under the FFCRA for purposes of the Refundable Payroll Credit. Instead, this test considers whether the entities are part of a controlled group or affiliated service group.

May an employer receive both a loan under the Paycheck Protection Program and the Employee Retention Credit?

No. Employers who receive a small business loan under the Paycheck Protection Program (PPP - Section 1102 of the CARES Act) are not eligible for this credit.

For more information on the Employee Retention Credit, see FAQs: Employee Retention Credit Under The CARES Act.

May an employer receive both a credit for qualified leave wages under FFCRA and the Employee Retention Credit under the CARES Act?

Yes, but not for the same wages. Qualified wages for which an employer may claim the Employee Retention Credit do not include the amount of qualified leave wages for which the employer received a tax credit under the FFCRA.

Does the CARES Act authorize employers to delay of payment of employer payroll taxes?

Yes. Section 2302 of the CARES Act authorizes employers and self-employed individuals to defer payment of the "employer's share" of the Social Security tax they otherwise are responsible to remit to the federal government with respect to their employees.⁷ Employers continue to be obligated to withhold and pay the employee's 6.2 percent share of Social Security tax due on the employee's wages. Applicable employment taxes do not include the employer portion of Medicare taxes imposed under IRC Section 3111(b).

For this purpose, employers may delay the deposit of the employer's share of Social Security taxes with respect to deposits due on or after March 27, 2020 and ending on December 31, 2020. Employers remain liable for the deferred employment taxes and are obligated to pay 50 percent of the deferred taxes by December 31, 2021 and the other 50 percent by December 31, 2022.

May an employer receive both a loan under the Paycheck Protection Program and delay of payment of employer payroll taxes?

Yes, but only if the loan is not forgiven: The tax deferment relief provided by Section 2302 of the CARES Act is not applicable to a borrower participating in the Paycheck Protection Program in Section 1102 if the loan is forgiven. Accordingly, additional guidance will be necessary to clarify the application of this limitation.

For more cutting-edge perspectives on the legal and business implications of COVID-19, visit our COVID-19 resource center.

Footnotes

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