IRS Penalty Relief Addresses Employment Taxes and COVID-19 Paid Leave | Practical Law

IRS Penalty Relief Addresses Employment Taxes and COVID-19 Paid Leave | Practical Law

The Internal Revenue Service (IRS) has issued penalty relief (Notice 2020-22) regarding employer deposits of certain federal employment taxes to coordinate with refundable payroll tax credits that are permitted under the Families First Coronavirus Response Act (Families First Act) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Families First Act and CARES Act require certain employers to provide paid leave in response to the US outbreak of COVID-19, and make available related payroll tax credits.

IRS Penalty Relief Addresses Employment Taxes and COVID-19 Paid Leave

Practical Law Legal Update w-024-7977 (Approx. 6 pages)

IRS Penalty Relief Addresses Employment Taxes and COVID-19 Paid Leave

by Practical Law Employee Benefits & Executive Compensation
Published on 02 Apr 2020 • USA (National/Federal)
The Internal Revenue Service (IRS) has issued penalty relief (Notice 2020-22) regarding employer deposits of certain federal employment taxes to coordinate with refundable payroll tax credits that are permitted under the Families First Coronavirus Response Act (Families First Act) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Families First Act and CARES Act require certain employers to provide paid leave in response to the US outbreak of COVID-19, and make available related payroll tax credits.
The IRS has provided penalty relief (Notice 2020-22) regarding employer deposits of certain federal employment taxes to coordinate with employer eligibility for refundable payroll tax credits under the Families First Coronavirus Response Act (Families First Act) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (respectively, Pub. L. No. 116-127 (2020) and Pub. L. No. 116-136 (2020); see Legal Updates, COVID-19 Legislation Includes Group Health Plan Coverage Requirements and CARES Act Contains Numerous Employee Benefit and Executive Compensation Provisions, Including Changes to COVID-19 Testing Mandate). For a continuously updated collection of resources addressing COVID-19, the disease that results from SARS-CoV-2, see Practical Law's Global Coronavirus Toolkit.
The relief under Notice 2020-22 addresses deposits of the following employment taxes:
Under the IRS's guidance, employers may pay leave wages (required under the Families First Act) and retention wages (required under the CARES Act) using amounts that would otherwise need to be submitted to the federal government for employment taxes without incurring penalties for failing to deposit these amounts (see Legal Update, IRS Procedures Address Employee Retention Tax Credit Under CARES Act). Under normal procedures, employers are generally required to deposit employment taxes on a monthly or bi-weekly basis.

Tax Credits Related to Expanded FMLA and Sick Leave Requirements

As background, the Families First Act requires small and mid-sized employers to provide paid sick leave (under the Emergency Paid Sick Leave Act (EPSLA)) and paid leave relating to the Family and Medical Leave Act (FMLA) (under the Emergency Paid Family and Medical Leave Expansion Act (EFMLA)) for absences resulting from COVID-19 (see Article, Expert Q&A: COVID-19 and Employment). Collectively, these paid sick leave wages (under the EPSLA) and family leave wages (under the EFMLA) are referred to as "qualified leave wages."
The Families First Act also provides for refundable tax credits relating to the paid sick leave and family leave wages, which are intended to fully reimburse employers for the cost of providing paid leave under the EPSLA and EFMLA to employees (see Legal Update, IRS Addresses Payroll Tax Credits for Leave Under COVID-19 Legislation). For each quarter, the refundable tax credit is available against the employer's share of:
  • The Social Security portion of FICA tax.
  • The Social Security and Medicare portions of RRTA tax.
The credits equal 100% of qualified leave wages paid by the employer.
For employers subject to FICA, the EPSLA and EFMLA credits also are increased by the amount of the employer's share of Medicare tax imposed on qualified leave wages.
Employers may claim the refundable tax credits for qualified leave wages paid for the period from April 1, 2020 to December 31, 2020 (Notice 2020-21; see Legal Update, IRS Announces Effective Date for Payroll Tax Credits Under COVID-19 Legislation). Employers may also claim an advance payment of the refundable credit by filing IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
The payroll tax credits also reflect health insurance costs. Specifically, the credits are increased to reflect "qualified health plan expenses" allocable to qualified leave wages, defined as amounts that:
These qualified health plan expenses are properly allocated to the qualified leave wages if the allocation is made on a pro rata basis among covered employees.

Retention Wages Under the CARES Act

Under the CARES Act, a refundable tax credit also is available for employers that experience either:
  • A full or partial business suspension due to orders from a governmental authority resulting from COVID-19.
  • A specified decline in business.
(See Legal Update, IRS Procedures Address Employee Retention Tax Credit Under CARES Act.)
This credit can equal up to 50% of qualified wages (including qualified health expenses), but is limited to $10,000 per employee for all quarters combined. These wages are referred to as "qualified retention wages." Under the Families First Act and the CARES Act, an employer that pays either qualified leave wages or qualified retention wages may take refundable tax credits against a specified portion of the employer's portion of certain employment taxes.

IRS Relief Regarding Employment Taxes for Qualified Leave Wages

The Families First Act, as amended, instructs the IRS to waive penalties (under Code Section 6656) for failures to deposit the employer's share of Social Security taxes when the employer anticipates claiming the refundable tax credits (26 U.S.C. § 6656). Under Notice 2020-22, as a result, employers are not subject to Code penalties for failing to deposit employment taxes related to qualified leave wages for a quarter if the following three requirements are satisfied:
  • The employer must pay employees qualified leave wages in the quarter before the time of the required deposit.
  • The amount of employment taxes that an employer does not timely deposit must be less than or equal to the amount of the employer's anticipated tax credits under the EPSLA and EFMLA for the quarter (at the time of the required deposit).
  • The employer cannot seek payment of an advance credit by filing Form 7200 as to the anticipated credits that it relied on to reduce its deposits.
The total amount of any reduction in a required deposit generally may not exceed the total amount of qualified leave wages, qualified health plan expenses, and the employer's share of Medicare tax on qualified leave wages for a quarter.

IRS Relief Regarding Employment Taxes and Qualified Retention Wages

In addition, an employer is not subject to penalties for failing to deposit employment taxes related to qualified retention wages for a quarter if the following three requirements are satisfied:
  • The employer must pay employees qualified retention wages in the quarter before the time of the required deposit.
  • The amount of employment taxes that an employer does not timely deposit (reduced by the amount of employment taxes not deposited in anticipation of credits for qualified leave wages (see IRS Relief Regarding Employment Taxes for Qualified Leave Wages)) must be less than or equal to the amount of the employer's anticipated credits under the CARES Act's qualified retention wages provision for the quarter (at the time of the required deposit).
  • The employer cannot seek payment of an advance credit by filing Form 7200 as to the anticipated credits that it relied on to reduce its deposits.
(See Legal Update, IRS Procedures Address Employee Retention Tax Credit Under CARES Act.)
As is the case with qualified leave wages, the total amount of any reduction in a required deposit generally may not exceed the total amount of qualified retention wages for a quarter.

Applicability of Notice 2020-22 Relief

Notice 2020-22 applies to deposits of employment taxes that are reduced in anticipation of credits regarding:
  • Qualified leave wages paid during the period beginning April 1, 2020, and ending December 31, 2020.
  • Qualified retention wages paid during the period beginning March 13, 2020, and ending December 31, 2020.
(See Legal Update, IRS Procedures Address Employee Retention Tax Credit Under CARES Act.)

Practical Impact

Notice 2020-22 is one piece of a set of IRS guidance regarding the payroll tax credits issued in response to the Families First Act and the CARES Act, and includes a preliminary overview of the credits issued last week (see Legal Update, IRS Addresses Payroll Tax Credits for Leave Under COVID-19 Legislation). We expect more guidance in this space in the coming days to address how the credits work in greater detail.