The Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security, or CARES Act, provide refundable tax credits to certain employers that continue to pay their employees during the COVID-19 pandemic. The Internal Revenue Service is also providing employers eligible for these credits with relief from the penalty for failing to timely deposit employment taxes.
Qualified Leave Wages Credits
The FFCRA established two refundable tax credits — the qualified sick leave wages credit and the qualified family leave wages credit — in an effort to provide “eligible employers” with the funds necessary to pay “qualified sick leave wages” and “qualified family leave wages” to their employees during the period April 1, 2020, to Dec. 31, 2020. The credits are allowed against the eligible employer’s portion of Social Security tax due on all wages paid during the period April 1, 2020, to Dec. 31, 2020. If the amount of the credit exceeds the employer’s Social Security tax liability, then the excess is treated as an overpayment and refunded to the employer.
Gregory A. Bocchino, partner – tax at KPMG LLP, is the national leader of KPMG's Accounting Methods and Credits practice and has more than 20 years of federal income tax accounting methods and credits experience.
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Joshua Ronen is a professor of accounting at New York University Stern School of Business and co-editor of the "Journal of Law, Finance, and Accounting." Professor Ronen teaches courses in managerial accounting, financial accounting, advanced topics in financial accounting, and financial statements analysis. Ronen has been with NYU Stern for nearly 45 years. His primary research areas include capital markets, disclosure, earning management, economic impact of accounting rules and regulations, financial reporting, legal liability of firms, transfer pricing, agency theory, corporate governance, and fair valuation. Ronen has written numerous books including "Accounting and Financial Globalization," "Off-Balance Sheet Activities," "Entrepreneurship," "Smoothing Income Numbers: Objectives, Means and Implications," and "Earnings Management." He has been published in many academic journals including and publications including The New York Times, The Accounting Review, Journal of Accounting Research, Journal of Accounting, Auditing and Finance, Abacus, Management Science, Journal of Public Economics, Journal of Organizational Behavior and Human Performance, Stanford Journal of Law, Business, and Finance, and Journal of Financial Markets. In addition to his work at NYU Stern, Ronen has lectured at University of Canterbury, Tel-Aviv University, Federal University of Rio de Janeiro, National University of Mexico, University of Toronto, University of Chicago, Hebrew University, and London School of Economics among many others. He has also been a consultant for numerous organizations, including especially law firms as expert witness in the area of securities litigation. His suggestions for reform in the accounting profession have received critical acclaim by legislators and in the media. Ronen received his Bachelor of Arts in Economics and Accounting at Hebrew University in Israel, and his Doctor of Philosophy from Stanford University. Professor Ronen is also a licensed CPA in Israel.
Eligible employers claim the qualified leave wages credits on Form 941, but they can benefit more quickly from the credits by reducing their federal employment tax deposits. In other words, eligible employers can retain federal employment taxes that they otherwise would have deposited in an amount up to the level of qualified leave wages credits for which they are entitled.
Eligible employers are businesses and tax-exempt organizations that have fewer than 500 employees, and are required under the FFCRA to pay qualified sick leave wages and qualified family leave wages. Qualified sick leave wages are wages an eligible employer is required to pay to an employee who is unable to work or telework because of either the employee’s personal health status as a result of COVID-19 or the employee’s need to care for others as a result of COVID-19. Qualified family leave wages are wages an eligible employer is required to pay to an employee who is unable to work or telework because the employee is caring for a child whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19.
The qualified sick leave wages credit is generally equal to the amount of qualified sick leave wages paid plus the amount of qualified health plan expenses allocable to the qualified sick leave wages paid plus the employer’s portion of Medicare tax due on the qualified sick leave wages paid. However, the maximum amount that can be treated as qualified sick leave wages paid to any one employee is limited, and the limit depends on why the employee receiving the wages is on sick leave. If the employee is on sick leave because of their own health status, the limit is $511 per day up to a total of $5,111. If the employee is on sick leave because they are caring for others, the limit is $200 per day up to a total of $2,000.
The qualified family leave wages credit is generally equal to the amount of qualified family leave wages paid plus the amount of qualified health plan expenses allocable to the qualified family leave wages paid plus the employer’s portion of Medicare tax due on the qualified family leave wages paid. However, the maximum amount that can be treated as qualified family leave wages paid to any one employee is limited to $200 per day up to a total of $10,000.
Employee Retention Credit
The CARES Act also established a refundable tax credit — the Employee Retention Credit — for “eligible employers” that pay “qualified wages” to their employees between March 13, 2020, and Dec. 31, 2020. The credit is equal to 50 percent of qualified wages paid, limited to a maximum credit of $5,000 per employee, and is allowed against the eligible employer’s portion of Social Security tax due on all wages paid during the period March 13, 2020, to Dec. 31, 2020. If the amount of the credit exceeds the employer’s Social Security tax liability, then the excess is treated as an overpayment and refunded to the employer.
Eligible employers claim the Employee Retention Credit on Form 941, but they can benefit more quickly from the credit by reducing their federal employment tax deposits. In other words, eligible employers can retain federal employment taxes that they otherwise would have deposited in an amount up to the amount of the Employee Retention Credit for which they are entitled.
Eligible employers generally are businesses and tax-exempt organizations that either:
- Fully or partially suspended operations during 2020 due to a “stay-at-home” order; or,
- Experience a significant decline in gross receipts during 2020
However, employers that receive a Paycheck Protection Program loan are not eligible employers and, thus, they may not claim the Employee Retention Credit.
Qualified wages are generally wages paid by an eligible employer to employees between March 13, 2020, and Dec. 31, 2020, and during the period the employer experienced either a full or partial suspension of operations due to a “stay-at-home” order; or a significant decline in gross receipts.
Relief from penalty for failure to deposit employment taxes
An employer’s failure to timely deposit federal employment taxes is generally subject to a penalty. However, the IRS recently announced in Notice 2020-22 that an employer that is eligible for the Qualified Leave Wages Credits and/or the Employee Retention Credit will not be subject to a penalty for failing to deposit employment taxes if:
- The amount of the employment taxes the employer fails to timely deposit is less than or equal to the amount of the employer’s anticipated Qualified Leave Wages Credits and/or the Employee Retention Credit; and
- The employer did not seek payment of an advanced credit by filing Form 7200, “Advanced Payment of Employer Credits Due to Covid-19.”
As a result, an employer may reduce, without penalty, the amount of a deposit of employment taxes by the following amounts paid in the calendar quarter prior to the required deposit:
- Qualified leave wages;
- Qualified health plan expenses allocable to qualified leave wages;
- The employer’s share of Medicare taxes paid on the qualified leave wages; and,
- Qualified retention wages.
