On March 31, 2020, the IRS issued Form 7200 Advance Payment of Employer Tax Credits Due to COVID-19 and instructions for eligible employers to claim advance payments of refundable payroll tax credits related to COVID-19. The IRS also has issued a number of FAQ’s regarding tax credits for COVID-19 that include information about how to calculate the tax credits, as well as information about how to offset the credits immediately against payroll taxes that would otherwise be deposited currently. Governmental employers are not entitled to these tax credits and thus may not use Form 7200.

Eligible employers will claim COVID-19 related tax credits on their federal employment tax returns (e.g. Form 941: Employer's Quarterly Federal Tax Return), but they can gain immediate cash flow relief by reducing their federal employment tax deposits as they become due. If the employer has insufficient federal employment taxes due to cover the amount of the tax credits, then an eligible employer may request an advance payment of the credits from the IRS by submitting the new Form 7200. The IRS expects to begin processing these requests during April 2020.

Employers may receive advance payments for the refundable portions of payroll tax credits introduced by the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The FFCRA includes payroll tax credits for the amount of the required paid sick and family and medical leave related to COVID-19, the allocable health care costs, and the amount of employer Medicare taxes on the leave subject to certain limits, for non-governmental employers with fewer than 500 employees. These credits are also available for the self-employed. See our article on IRS guidance on the leave tax credits under the FFCRA.

The CARES Act also offers separate payroll tax credits against employer FICA taxes for qualifying wages and the allocable portion of health care costs (referred to as "Employee Retention Credit" under the IRS guidance and FAQ's) for certain businesses with partially or fully suspended operations due to COVID-19 or with significant declines in revenue in 2020. See our article on the employer retention credit and additional payroll tax relief.

Form 7200 would be used to request advances on both the refundable amounts for the FFCRA leave credits and the CARES Act employee retention credits. As noted above, eligible employers first reduce their current employment tax deposits to account for the credits. For any amounts that exceed the reduced deposits, eligible employers may either request a payment from the IRS in advance by filing Form 7200 or wait to receive the refund after the credit is claimed on an employment tax return (e.g., Forms 941, 943, 944 or CT-1).

The IRS FAQs provide the following example on how to use the Form 7200: An eligible employer paid $10,000 in qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same quarter. The employer can keep the entire $8,000 of taxes that the employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on the Form 941. The employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.

According to the instructions, employers would be able to file the Form 7200 requesting an advance related to credits for a quarter at any time before the end of the month following the quarter. In addition, an employer could file the form multiple times for a quarter with respect to claiming the refundable portions associated with multiple deposits.

The IRS will not allow employers to file a Form 7200 to make corrections to a previously filed Form 7200. Instead, the employer would make corrections using the employment tax return applicable to the employer.

Employment Tax Returns Filed by Third-Party Payers

Common-law employers of workers with wages that qualify for the tax credits under the FFCRA or the CARES Act are entitled to claim the related tax credits, even if a third-party payer, such as a payroll service provider, professional employer organization, certified professional employer organization, or a Section 3504 Agent, is used by the employer to report and pay federal employment taxes. The third-party payer of employment taxes is not entitled to the tax credits, even if it may be considered an "employer" for other purposes. Employers who use third-party payers to deposit employment taxes may submit the Form 7200 to claim the advance payment but should carefully review the instructions for Form 7200 and provide copies of the Form 7200 submitted to the third party payer so they can reconcile the credits with the employment tax return.

For further information on claiming the tax credits available under the FFCRA or CARES Act, contact Judy Boyette, Liz Masson, or Nancy Dollar.