IRS Provides Relief from Penalty for a Failure to Timely Deposit Employment Taxes

(Parker Tax Publishing April 2020)

The IRS is providing penalty relief with respect to certain employers' deposits of federal employment taxes, including deposits of withheld income taxes, taxes under the Federal Insurance Contributions Act, and taxes under the Railroad Retirement Tax Act. Specifically, the IRS is providing relief to employers entitled to the new refundable tax credits provided under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act. Notice 2020-22.

Background

Code Sec. 3111(a) (employer's share of the Old Age, Survivors, and Disability Insurance (social security) portion of Federal Insurance Contributions Act (FICA tax)), Code Sec. 3221(a) (employer's share of the social security and Hospital Insurance (Medicare) portions of Railroad Retirement Tax Act (RRTA tax)), along with Code Sec. 3402 (relating to federal income tax withholding), impose employment tax liability on employers. For most employers, this liability is reported on the quarterly Form 941, Employer's QUARTERLY Federal Tax Return.

The Families First Coronavirus Response Act (Families First Act) (Pub. L. 116-127), which was signed into law on March 18, generally requires employers of fewer than 500 employees to provide paid sick leave and expanded family and medical leave, up to specified limits, to employees unable to work or telework due to certain circumstances related to the coronavirus disease 2019 (COVID-19). Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act (collectively, Qualified Leave Wages), as well as qualified health plan expenses allocable to Qualified Leave Wages (Qualified Health Plan Expenses) are eligible for the following refundable tax credits under the Families First Act:

(1) the payroll credit for required paid sick leave, and

(2) the payroll credit for required paid family leave.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. 116-136), which was signed into law on March 27, provides that certain employers experiencing a full or partial business suspension due to orders from a governmental authority as a result of COVID-19, or experiencing a statutorily specified decline in business, are allowed a refundable employee retention credit of up to 50 percent of the qualified wages, including allocable qualified health expenses, limited to $10,000 per employee over all calendar quarters combined (Qualified Retention Wages).

The CARES Act also provides that the payment and deposit of the employer's share of the social security portion of FICA tax and the employer's share of the social security portion of RRTA tax for deposits that are due to be made during the period beginning on March 27, 2020, and ending before January 1, 2021, is not due before December 31, 2021 (for the first 50 percent of the liability), and December 31, 2022 (for the remaining 50 percent of the liability). Under this provision, an employer is treated as having timely made these required deposits of FICA and RRTA taxes if all such deposits are made not later than the applicable due dates.

Under the Families First Act and the CARES Act, an employer paying Qualified Leave Wages or Qualified Retention Wages may take refundable tax credits against a specified portion of the employer's share of certain employment taxes.

Relief from Failure to Deposit Penalty for Failure to Deposit Certain Employment Taxes

In Notice 2020-22, the IRS provides relief from the failure to deposit penalty under Code Sec. 6656 for an employer's failure to timely deposit employment taxes to the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act. This relief is aimed at ensuring that such employers may pay Qualified Leave Wages required by the Families First Act or Qualified Retention Wages under the CARES Act by using employment taxes, which would otherwise be required to be deposited, without incurring a failure to deposit penalty.

Observation: The IRS has recently released Draft Form 7200, Advance Payment of Employer Credits Due to COVID-19 and Draft Instructions for Draft Form 7200.

Notice 2020-22 applies to deposits of employment taxes reduced in anticipation of the credits with respect to Qualified Leave Wages paid with respect to the period beginning April 1, 2020, and ending December 31, 2020, and in anticipation of the credits with respect to Qualified Retention Wages paid with respect to the period beginning on March 13, 2020, and ending December 31, 2020.

Employment Taxes Related to Qualified Leave Wages: Notice 2020-22 provides that an employer will not be subject to a penalty under Code Sec. 6656 for failing to deposit employment taxes relating to Qualified Leave Wages in a calendar quarter if the following three conditions are met:

(1) The employer paid Qualified Leave Wages to its employees in the calendar quarter before the time of the required deposit.

(2) The amount of employment taxes that the employer does not timely deposit is less than or equal to the amount of the employer's anticipated payroll tax credits under the Families First Act for required paid sick leave and required paid family leave for the calendar quarter as of the time of the required deposit.

(3) The employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to the anticipated credits it relied upon to reduce its deposits.

Thus, an employer may reduce, without a penalty under Code Sec. 6656, the amount of a deposit of employment taxes by the amount of Qualified Leave Wages and Qualified Health Plan Expenses paid by the employer in the calendar quarter before the required deposit, plus the amount of the employer's share of Medicare tax on such Qualified Leave Wages, as long as the employer does not also seek an advance credit with regard to the same amount.

For purposes of this relief, the total amount of any reduction in any required deposit may not exceed the total amount of Qualified Leave Wages and Qualified Health Plan Expenses and the employer's share of Medicare tax on the Qualified Leave Wages in the calendar quarter, minus any amount of Qualified Leave Wages, Qualified Health Plan Expenses, and employer's share of Medicare tax that had been previously used:

(1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by Notice 2020-22, or

(2) to seek payment of an advance credit.

Employment Taxes Related to Qualified Retention Wages: Under Notice 2020-22, an eligible employer will not be subject to a penalty under Code Sec. 6656 for failing to deposit employment taxes relating to Qualified Retention Wages in a calendar quarter if the following three conditions are met:

(1) The employer paid Qualified Retention Wages to its employees in the calendar quarter before the time of the required deposit.

(2) The amount of employment taxes that the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed for Qualified Leave Wages, Qualified Health Plan Expenses, and the employer's share of Medicare tax on the Qualified Leave Wages is less than or equal to the amount of the employer's anticipated employee retention credits under the CARES Act for the calendar quarter as of the time of the required deposit.

(3) The employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to the anticipated credits it relied upon to reduce its deposits.

Thus, after a reduction, if any, of a deposit of employment taxes by the amount of credits anticipated for Qualified Leave Wages, an employer may further reduce, without a penalty under Code Sec. 6656, the amount of the deposit of employment taxes by the amount of Qualified Retention Wages paid by the employer in the calendar quarter before the required deposit, as long as the employer does not also seek an advance credit with regard to the same amount.

For purposes of this relief, the total amount of any reduction in any required deposit may not exceed the total amount of Qualified Retention Wages in the calendar quarter, minus any amount of Qualified Retention Wages that had been previously used to:

(1) reduce a prior required deposit in the calendar quarter and obtain the relief provided by Notice 2020-22, or

(2) to seek payment of an advance credit.

For a discussion of the various business tax credits enacted in the Family First Act and the CARES Act, see Parker Tax ¶106,400. For a discussion of penalties for failing to deposit employment taxes on time and exceptions from those penalties, see Parker Tax ¶252,135.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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