The set of employment taxes against which three new refundable payroll tax credits may be directly applied and that employers may avoid depositing in anticipation of the credits is broader under IRS guidance than in recent legislation because the IRS simplified these processes.
The employer portion of Social Security tax imposed by Internal Revenue Code Section 3111(a) was the only employment tax, other than with regard to assessments under the Railroad Retirement Tax Act, that was identified in the Families First Coronavirus Response Act (FFCRA), enacted March 18, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, as eligible for the three new payroll tax credits to be directly applied against and able to be retained by an employer without penalty under I.R.C. Section 6656 instead of deposited because of anticipated reduction in employment tax liability through at least one of the credits.
Sections 7001 and 7003 of the FFCRA established the ability to directly apply the credit for paid sick leave related to COVID-19, also known as the credit for qualified sick leave wages, and the credit for paid public health emergency leave, also known as the credit for qualified family leave wages, against the employer portion of Social Security tax.
Section 2301 of the CARES Act established the ability to directly apply the employee retention credit against the employer share of Social Security tax and to retain the employer share of Social Security tax instead of depositing it because of the “reasonable anticipation of the credit,” with the amount retained equal to or less than the available credit.
Section 3606 of the CARES Act amended the FFCRA to allow all or part of the employer portion of Social Security tax to be retained instead of deposited in connection with applying the credit for qualified sick leave wages or the credit for qualified family leave wages.
However, the instructions for the finalized Form 7200, Advance Payment of Employer Credits Due to COVID-19, expanded the set of employment taxes against which the credits may be directly applied, as the instructions say that the “employment taxes that are available for the credits include withheld federal income tax, the employee share of social security and Medicare taxes, and the employer share of social security and Medicare taxes with respect to all employees.”
Notice 2020-22 likewise expanded the set of employment taxes that employers are not required to deposit, in anticipation of acquiring at least one of the three credits, to include federal income tax withheld and the employer and employee portions of Social Security and Medicare taxes, as long as the total amount of these employment taxes not deposited on a deposit date for this purpose is equal to or less than the total refundable tax credit amount that would be attributable to that deposit date.
Expanding the set of taxes against which the credits may be directly applied streamlines the crediting process through avoiding the step of reconciling excess credit amounts with liability for types of employment taxes not directly subject to the credits before refunds could be acquired. According to the IRS’s FAQs on the Employee Retention Credit, if the employer portion of Social Security tax were treated as the only employment tax against which the credits could be directly applied, then because of their refundable nature, the amount by which the credits exceeded the employer portion of Social Security tax would have needed to be “applied to offset any remaining tax liability on the employment tax return” before any refundable overpayment could be recognized. Instead, through Form 7200 and its instructions treating as directly subject to the credits not just the employer portion of Social Security tax but the employee portion of Social Security tax, the employer and employee portions of Medicare tax, and federal income tax withheld, the process of determining whether there is a refundable overpayment is itself more direct.
The ability articulated by Notice 2020-22 to retain, in anticipation of being able to apply the credits, not just the employer portion of Social Security tax, but the employee portion of Social Security tax, the employer and employee portions of Medicare tax, and federal income tax withheld allows employers to have symmetry between the amounts they may retain and the types of employment tax articulated by the instructions to Form 7200 as eligible for direct application of the credits. Had employers needed to deposit all of these taxes except the employer portion of Social Security tax, even if their anticipated total refundable credit substantially exceeded the employer portion of Social Security tax, this could have resulted in the IRS needing to refund overpayments of amounts that under the simplified process articulated by Notice 2020-22 employers can retain instead of having to send to the IRS.
The finalized instructions for Form 7200 identify that employers could “first reduce [their] employment tax deposits to account for the credits.” Employers then would use Form 7200 to request credit amounts that exceed their reduced employment tax deposits, although as an alternative to filing the form, employers could forgo advances of the excess credit amounts and instead claim the refundable portions when they claim the credits on Form 941, Employer’s Quarterly Federal Tax Return, 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.
An employer that already retained an amount of employment taxes that it otherwise would have deposited in anticipation of being able to claim a refundable credit amount that it could request as an advance through Form 7200 would not be permitted to file Form 7200 to request an advance of the amount of employment taxes it retained instead of depositing, but would be permitted to file Form 7200 to request an advance of the amount by which their total refundable credit exceeds their employment tax liability. Employers “should retain an amount of the employment taxes equal to the amount of qualified sick and family leave wages (plus certain related health plan expenses and the employer’s share of the Medicare taxes on the qualified leave wages) and their employee retention credit, rather than depositing these amounts with the IRS,” according to the instructions for Form 7200.
Unlike many other forms currently able to be filed with the IRS, the only way that the IRS has identified to file Form 7200 is by fax, according to the text of the form itself and its instructions. An employer would fax Form 7200 to 855-248-0552 to file the form.