The IRS has issued a final version of Form 7200 (Advance Payment of Employer Credits Due to COVID-19) and its accompanying instructions on March 31, 2020. Sick and family leave credits. The Families First Coronavirus Response Act (FFCRA) requires eligible employers to provide paid sick leave and expanded family and medical leave for COVID-19 related reasons and offsets the costs of providing required leaves with refundable paid tax credits for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family leave under the FFCRA.
Employee retention credit. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees after March 12, 2020 and before Jan. 1, 2021. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings; who have experienced a greater than 50% reduction in gross receipts, compared to the same quarter a year earlier basis.
Advance payment of the credits. The FFCRA and CARES Act provide that eligible employers who pay qualified sick and family leave wages or qualified wages eligible for the employee retention credit should retain an amount of the employment taxes equal to the amount of qualified sick and family leave wages (plus certain related health plan expenses and the employer’s share of the Medicare taxes on the qualified leave wages) and their employee retention credit, rather than depositing these amounts with IRS.
Both Acts also provide that if there aren’t sufficient employment taxes to cover the cost of qualified sick and family leave wages (plus the qualified health expenses and the employer share of Medicare tax on the qualified leave wages) and the employee retention credit, employers can obtain an advance payment of the credits.
Form 7200. Employers that file Form 941 (Employer’s Quarterly Federal Tax Return), 943 (Employer’s Annual Federal Tax Return for Agricultural Employees), 944 (Employer’s Annual Federal Tax Return), or CT-1 (Employer’s Annual Railroad Retirement Tax Return) may file Form 7200 to request an advance payment of the tax credit for qualified sick and family leave wages and the employee retention credit.
Employers need to reconcile any advance credit payments and reduced deposits on their employment tax return(s) that they will file for 2020. Employers not requesting advance payments are not required to file Form 7200. The employment taxes that are available for the credits include withheld federal income tax, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees. If there aren’t sufficient employment taxes to cover the cost of qualified sick and family leave wages (plus the qualified health expenses and the employer share of Medicare tax on the qualified leave wages) and the employee retention credit, employers can file Form 7200 to request an advance payment from the IRS.
An employer should first reduce its employment tax deposits to account for the credits and can request the amount of the credit that exceeds its reduced deposits by filing Form 7200 or waiting to get a refund when the employer claims the credits on their employment tax return.
Examples. If an employer is entitled to a credit of $5,000 for qualified sick leave wages, certain related health plan expenses, and the employer’s share of Medicare tax on the leave wages and is otherwise required to deposit $8,000 in employment taxes, the employer could reduce its federal employment tax deposits by $5,000. The employer would only be required to deposit the remaining $3,000 on its next regular deposit date.
If an employer is entitled to an employee retention credit of $10,000 and was required to deposit $8,000 in employment taxes, the employer could retain the entire $8,000 of taxes as a portion of the refundable tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using Form 7200.
Employment tax return filed by a third-party provider. A common-law employer of the individuals that are paid qualified sick or family leave, or wages qualifying for the employee retention credit, is entitled to the credit for the sick and family leave wages or the employee retention credit, regardless of whether the employer uses a third-party payer (such as a payroll service provider, professional employer organization (PEO), certified professional employer organization (CPEO), or Section 3504 Agent) to report and pay federal employment taxes. The third-party payer isn’t entitled to the credits with respect to the wages it remits on the employer’s behalf (regardless of whether the third-party payer is considered an “employer” for other purposes).
A client of a non-certified PEO (a PEO that pays wages to individuals as part of the services provided to a client pursuant to a service agreement, such as collecting, reporting, and/or paying or depositing employment taxes) that is otherwise entitled to request the advance payment of the credits on Form 7200 may still request the advance even though its employment tax return information is included on the aggregate employment tax return filed by the non-certified PEO.
Correcting Form 7200. An employer cannot file a corrected Form 7200. If an employer makes an error on Form 7200, the error will be corrected when the employer files its Form 941, 943, 944, or CT-1 for 2020. The employer tax credits for qualified sick leave wages and qualified family leave wages apply to those wages paid for the period from April 1, 2020, to Dec. 31, 2020.
The employer tax credit for qualified wages for retention of employees during suspension of operations due to a government order or due to a significant decline in gross receipts applies to those wages paid after March 12, 2020 and before Jan. 1, 2021.
An employer can file the form for an advance payment of the credits anticipated for a quarter at any time before the end of the month following the quarter in which it paid the qualified wages. Form 7200 can be filed several times during each quarter if necessary.
Form 7200 should not be filed after the employer files Form 941 for the fourth quarter of 2020, or files annual Forms 943, 944, or CT-1 for 2020. In addition, an employer should not file the form to request an advance payment for any anticipated credit for which the employer already reduced its deposits. How to file Form 7200? According to the Form 7200 instructions, fax the completed form to (855) 248- 0552.