Businesses looking to get advance payments of credits intended to help them through the economic downturn caused by the pandemic are making some avoidable mistakes along the way, according to the IRS.
Employers filing for the advance payment of qualified sick leave and employee retention tax credits are doing so on a new form, and there have been bumps along the way, Melissa Duce, senior technician reviewer (employment tax 2), IRS Office of Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes), said October 1 during an American Bar Association Section of Taxation virtual meeting.
The forms were created amid legislation that provided employers with incentives to keep paying employees as COVID-19 essentially shut down the economy in March.
The Families First Coronavirus Response Act (P.L. 116-127) provided businesses with credits for the costs of giving employees required paid sick leave and expanded family and medical leave related to COVID-19.
The Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) offered employers several options to get their hands on much-needed cash. Those options included the Paycheck Protection Program, which allows business to take loans that are forgiven tax free if a specified portion of the proceeds is spent on payroll costs.
Companies can forgo that loan and instead take advantage of the ERTC, which is fully refundable and is applied against the employer’s portion of payroll taxes. Only $10,000 of wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.
For businesses that want advance payment of the credits, Form 7200, “Advance Payment of Employer Credits Due to COVID-19,” is one option. The form asks for basic taxpayer information, historical filing information, and information about the advance credits the employer is requesting. If the employer uses a third-party payer, it must list the name and employer identification number of that third-party payer as well.
Employers can’t reduce deposits and claim advances for the same credits, Duce said. If an employer requests an advance on a Form 7200, the employer will reconcile any advance payments and reduced deposits on the employment tax return that it files, she noted.
Employers aren’t required to file Form 7200 — instead, an employer can request the amount of the credit that exceeds its reduced deposits by claiming the credits on its employment tax return and getting a refund for the excess, subject to offsets, Duce said.
However, Duce said the Form 7200 isn’t used to report the credit; the employment tax return reports the credit.
“If an employer files a [Form] 7200, they should still report their full credit on Form 941,” Duce said.
Common errors on the Form 7200 include missing or inaccurate EINs and checking more than one box for the applicable calendar quarter that the form relates to — employers should submit separate forms for each calendar quarter, Duce said.
Another error occurs when employers check more than one box in part 1, line A, which asks which employment tax return the employer filed or will file for 2020, Duce said. In addition, some Forms 7200 simply aren’t signed, she added.
Deferral Disaster
President Trump sought to provide more relief for workers who are financially struggling by signing an executive memorandum on August 8 that directed Treasury Secretary Steven Mnuchin to allow employers to defer the withholding and payment of some employees’ portion of payroll taxes on compensation from September 1 through December 31.
In guidance (Notice 2020-65, 2020-38 IRB 567) released August 28, the IRS said participating employers will be required to repay the deferred taxes during the first four months of 2021.
The guidance wasn’t comforting to most businesses, with some pointing out that employees will face a potential hardship because double withholding of the 6.2 percent Social Security tax will be required. Another issue that came up concerns how an employer should treat the deferred taxes of employees who later quit.
Duce said the language in the notice says that if employers aren’t able to ratably withhold during the period from January 1, 2021, to April 30, 2021, they can make other arrangements to collect the taxes from the employee.
The relief in Notice 2020-65 is optional for employers, and nothing prevents them from seeking employee input on whether to take advantage of the deferral, Duce said. The relief was meant to provide flexibility, she added.