Reporting and Reconciling FFCRA and CARES Tax Credits (Benefit Minute)

Posted in: Benefit Minute, COVID-19, Employee Benefits

The Internal Revenue Service has released an updated Form 941 (Employer’s Quarterly Federal Tax Return) to account for Families First Coronavirus Response Act (FFCRA) qualified leave wages and Coronavirus Aid, Relief, and Economic Security Act (CARES) employee retention wages and payroll tax deferrals. The form generally applies for wages paid beginning April 2020.

Detail of Form Changes

New line items on Form 941 include:

  • Qualified sick leave wages
  • Qualified family leave wages
  • Nonrefundable portion of credit for qualified sick and family leave wages (from worksheet)
  • Nonrefundable portion of employee retention credit (from worksheet)
  • Deferred amount of employer share of Social Security tax
  • Refundable portion of credit for qualified sick and family leave wages (from worksheet)
  • Refundable portion of employee retention credit (from worksheet)
  • Total advances received on Form 7200 for the quarter
  • Qualified health plan expenses allocable to qualified sick leave
  • Qualified health plan expenses allocable to qualified family leave wages
  • Qualified wages for the employee retention credit
  • Qualified health plan expenses allocable to employee retention credit
  • Qualified wages paid March 13 through March 31, 2020, for the employee retention credit (2nd quarter 2020 only)
  • Qualified health plan expenses allocable to wages paid March 13 through March 31, 2020, for the employee retention credit (2nd quarter 2020 only)

The tax credits for FFCRA and employee retention qualified wages are taken against federal employment taxes that the employer otherwise owes.  However, the credits are fully refundable which means the employer may get a refund if the amount of the credits is more than employment taxes owed.   An eligible employer may receive FFCRA and employee retention tax credits, but not both for the same wages.  Qualified wages for purposes of the tax credits are wages subject to Social Security and Medicare taxes.

In anticipation of these tax credits, employers can fund qualified wages by accessing federal employment taxes, including withheld taxes that are required to be deposited and by filing Form 7200 to request an advance of the credits that are not funded by accessing federal employment tax deposits.

FFCRA Qualified Wages

Private employers with fewer than 500 employees are entitled to a tax credit for providing FFCRA-required leave.  Paid sick leave (up to 80 hours) is available to employees who are unable to work or telework due to certain COVID-19 related reasons.  The rate is either 100% of wages to $511/day or 2/3 of wages to $200/day, depending on the reason for sick leave.  Paid family leave (up to 10 weeks) at 2/3 of wages up to $200/day is available if employees are unable to work or telework to care for a child when school is closed or regular childcare is not available due to COVID-19.  Qualified health plan expenses allocable to paid leave are eligible for an additional credit.

Employee Retention Qualified Wages

The employee retention credit is available to private employers not receiving a Paycheck Protection Program loan who either:

  • fully or partially suspended operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
  • experienced a significant decline in gross receipts (as defined) during a calendar quarter in 2020.

The tax credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021 and is equal to 50% of up to $10,000 in qualified wages (including allocable qualified health plan expenses) per employee for all calendar quarters. The maximum credit for any employee is $5,000.

An eligible employer may claim a retention credit for qualified health plan expenses allocable to the time any furloughed employees are not receiving wages or providing services.

If the employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to employees for time that the employees were not providing services due to the reasons stated above. Qualified wages taken into account for such an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.  If the employer averaged 100 or fewer full-time employees in 2019, qualified wages are those paid to all employees during any period of economic hardship.

Payroll Tax Deferral

Employers may defer the deposit of the employer’s portion of Social Security (not Medicare) taxes that would otherwise made from March 27, 2020, through December 31, 2020.  50% of the deferred amount is due by December 31, 2021 and the additional 50% by December 31, 2022.

An employer is entitled to defer payment of these payroll taxes prior to determining paid leave credits or the employee retention credit and the amount of employment tax deposits that it may retain in anticipation of these credits.

Reconciling the Tax Credits and Deferral

The instructions to Form 941 include a worksheet that is used to calculate both the refundable and nonrefundable portions of the sick/family leave credit and the employee retention credit.

These amounts are carried forward to the revised Form 941, where the total of federal income withheld, employee and employer Social Security and Medicare taxes due and nonrefundable tax credits is reconciled to total tax deposits, payroll tax deferral and refundable tax credits.  This will result in either a balance due to the federal government or an overpayment that can either be applied to the next quarterly return or refunded to the employer.

Form 941 also includes specific questions about the components of the tax credits, including qualified wages for the employee retention credit as well as the amount of qualified health plan expenses allocable to sick leave wages, family leave wages and employee retention wages.

Form W-2 Reporting

In Notice 2020-54, the IRS is requiring that employers separately report, in Box 14 or on a separate statement, the amount of qualified sick leave wages at the $511 maximum rate, the amount of qualified sick leave wages at the $200 maximum rate and the amount of qualified family leave wages paid to an employee in 2020.  This reporting is primarily so that self-employed individuals can claim the tax credit.