April 24, 2020
Thomas E. Rutledge
Member, Stoll Keenon Ogden PLLC
Previously we have reviewed how many federal, state and local tax return and payment deadlines have been delayed consequent to the Covid-19 pandemic. HERE IS A LINK to our review of those delays as of April 15. But not every deadline has been delayed, and it remains important to comply with those unaltered deadlines.
One of the most important is the filing of Form 941, the Employer’s Quarterly Federal Tax Return. The due date for the first quarter 2020 Form 941 was April 30, 2020, and it remains April 30, 2020. The 941 reports federal income tax, social security (FICA) and Medicare taxes withheld from employee paychecks, and as well the employer’s portion of the FICA and Medicare taxes.
There is a Corona-19 virus program that is based upon your Form 941, but not for this first quarter of 2020. As such your first quarter 2020 Form 941 will be filed as it has always been filed. The new program does not apply until the filing for the second quarter of 2020.
Created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, there is now a refundable tax credit of up to 50% of wages paid after March 12, 2020 and before January 1, 2021. This credit is funded initially by allowing the employer to keep (i.e., not pay over to the government) the 6.5% it pays towards FICA taxes (for those more comfortable with Code citations, the credit is against the Code § 3111(a) obligation; it applies as well to the equivalent levy under the Railroad Retirement Tax Act). It does not apply to the Medicare tax (Code 3111(b)).
The credit works as follows. For “qualified wages” paid between March 12, 2020 and before January 1, 2021, the employer may take a credit of up to 50% by keeping what it would otherwise pay in FICA taxes on the employee’s behalf. The credit is limited to $10,000 of qualified wages paid each employee, so the maximum benefit is $5,000 per employee. The employer satisfies the credit by not remitting to the federal government what it would have paid as its portion of the FICA taxes paid for the employee. So, for example, if in a pay period the employer would have paid $118 of FICA taxes for a particular employee, it can keep that $118. And then in the next period it may do the same, until for that employee the annual limit of $5000 is reached. Unlike the Paycheck Protection Program (“PPP”) loan, which caps eligible employee wages at $100,000, there is no similar cap under this credit program. Also, the range of companies able to use this program is broader than the companies that were (and assuming it is reinitiated with new funds will be) eligible for PPP loans.
But wait, it gets better. The credit is refundable, which in effect accelerates its benefits. As detailed in the IRS’ FAQ:
Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to the Eligible Employer for the qualified wages paid to Employee A is $5,000. This amount may be applied against the employer share of social security taxes that the Eligible Employer is liable for with respect to all employee wages paid in Q2 2020. Any excess over the employer’s share of social security taxes is treated as an overpayment and refunded to the Eligible Employer after offsetting other tax liabilities on the employment tax return and subject to any other offsets under section 6402(a) of the Code.
So, even though as to a particular employee the employer will not have $5000 if FICA obligations in the second quarter, the employer can (i) retain what it otherwise would have paid and (ii) request from the IRS a payment equal to the difference between what was retained and $5000. You will report what you are doing, and if applicable make a request for a refund of the differential amount, on your second quarter 2020 Form 941. Alternatively, the employer may file a Form 7200 and request an advance payment. See the IRS’ information page on Form 7200.
Of course, it is not quite that simple; there are eligibility and other rules that need to be considered. The IRS has issued a FAQ spelling out those details.
Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for over 120 years.
Our firm’s Tax practice advises businesses and individuals on all aspects of local, state and federal taxation, including tax planning, audits, administrative hearings and trials.
Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.