COVID-19 Related Payroll Tax Credits
There have been a large number of payroll tax credits related to COVID-19 that have come from recent legislation, like the Families First Coronavirus Response Act (FFCRA), Taxpayer Certainty and Disaster Relief Act (TCDRA), Coronavirus Response and Relief Supplemental Appropriations Act (CRA), and the American Rescue Plan Act (ARPA). We have previously written about the Employee Retention Credit (ERC), one of the major COVID-19 related payroll tax credits. Since our article earlier this year, there have been a multitude of changes and additional guidance issued related to this topic. Unfortunately, most of the Internal Revenue Service (IRS) pages related to these items, including frequently asked questions (FAQs), have not yet been updated, but you can access them here. Hopefully, they will be updated soon, but until then we have put together links to some of the updated FAQs and resources available at this time.
The first significant COVID-19 related payroll tax credit to be explored is the Employee Retention Credit (ERC). Major items related to the ERC, include several notices and an extension of the dates during which wages can be used to claim the credit. On March 1, 2021, the IRS released Notice 2021-20 related to claiming the ERC for 2020. It includes clarification on certain terms included in the definition of the credit, as well as a list of FAQs that the IRS has gathered. On April 2, 2021, the IRS released Notice 2021-23 related to claiming the ERC for first and second quarters of 2021. Taxpayers were anxiously awaiting this guidance since there were several significant changes in the calculation of the credit coming from 2020 into 2021. The ARPA, enacted on March 11, 2021, extended the ERC through the end of 2021 and created a new category of eligible employer called the recovery startup business. These recovery startup businesses are businesses that started after February 15, 2020 and could be eligible for a potential credit of up to $100,000 in 2021. The IRS expects to issue additional guidance related to third and fourth quarters of 2021 later this year. For more information related to the Employee Retention Credit, follow this link to our prior article.
The COBRA Premium Assistance Credit is another significant COVID-19 related payroll tax credit that has come out of recent legislation. The IRS released Notice 2021-31 on May 18, 2021 to clarify some matters related to this credit. Per the news release on the IRS website, “the American Rescue Plan provides a temporary 100% reduction in the premium that individuals would have to pay when they elect COBRA continuation health coverage following a reduction in hours or an involuntary termination of employment. The new law provides a corresponding tax credit for the entities that maintain group health plans, such as employers, multiemployer plans, and insurers. The 100% reduction in the premium and the credit are also available with respect to continuation coverage provided for those events under comparable State laws, sometimes referred to as “mini-COBRA.” Notice 2021-31 provides information regarding the calculation of the credit, the eligibility of individuals, the premium assistance period, and other information vital to employers, plan administrators, and insurers to understand the credit.”
There have been a lot of questions and confusion related to how to claim these payroll tax credits. The IRS has provided updated instructions and worksheets for Form 941 to use in the calculation of these credits when filing the quarterly payroll tax return. There has been guidance issued that states that employment tax deposits can be reduced in anticipation of any credits expected to be received. This was a little scary for some taxpayers, since you cannot be sure you qualify for certain credits until the end of the applicable quarter and the IRS could assess penalties for under depositing payroll taxes. To address these issues, the IRS released Notice 2021-24 on April 13, 2021 to declare relief from penalties for failure to deposit employment taxes under certain circumstances. If you anticipate a credit amount larger than your payroll tax liability for the quarter, the IRS has also provided Form 7200 to be used to request advance payment of these employer credits due to COVID-19. This form can be used in the interim period between quarterly filings to request advanced payment of any credits expected. The IRS provides an expedited process for filing this form, including faxing instead of mailing, but we are still seeing long wait times on those funds being received by taxpayers.
The information available related to this topic is ever changing, so please reach out to Shelby Graham or your SDK advisor if you have questions or would like more information about this topic.