Employers Beware: IRS Guidance On Recapture Of Excess FFCRA Employment Tax Credits

Employers Beware: IRS Guidance On Recapture of Excess FFCRA Employment Tax Credits

The IRS released rules providing for the recapture of refundable employment tax credits under CARES and FFCRA. Form 7200 now allows employees to claim advance payments of any amounts remaining. However, the IRS guidance makes clear that employers are required to reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. For more information on the credits, visit Tax Facts Online.

What penalty relief is provided for employers who withhold payroll tax deposits in light of the employee retention tax credit and the paid leave credit?

The IRS has provided relief from penalties under IRC Section 6656 for an employer’s failure to timely deposit employment taxes to the extent that amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the CARES Act and the FFCRA.  The relief applies to reductions in deposit amounts based on wages paid for qualified leave between April 1, 2020 and December 31, 2020.  With respect to the employee retention credit, amounts withheld between March 13, 2020 and December 31, 2020 are covered.

For purposes of the FFCRA credits for paid leave, employment taxes include Social Security taxes, Medicare taxes and federal income tax withholding under Section 3402.  See Q 766.01 on the FFCRA paid leave requirements.

For purposes of the CARES Act employee retention credit, the offset can only be taken against the employer portion of the Social Security tax (i.e., the employer’s 6.2 percent), not the employee portion or the 1.45 percent Medicare tax.  See Q 8550.01 for more information on the employee retention tax credit.[1]

Employers eligible for the credit will not be subject to a penalty under IRC Section 6656 for failing to deposit employment taxes on qualified retention wages in a calendar quarter if:

    • The employer paid qualified retention wages to its employees in the quarter prior to the time of the required deposit,

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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

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