Understanding the COVID-19 Tax Credit

We answer commonly asked questions about the COVID-19 tax credit and Form 7200

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As a small business, you’re required — under the Families First Coronavirus Response Act (FFCRA) — to give paid sick and family leave to eligible employees impacted by COVID-19. Employees can use the paid leave for their own COVID-19 health reasons or to care for a family member.

But with the pandemic wreaking financial havoc across the nation, it’s no minor feat for small businesses to provide FFCRA leave, especially if they already offer paid leave under existing company policies. (FFCRA leave must be given in addition to any existing paid leave.)

Fortunately, you can offset this cost burden by claiming FFCRA tax credits on your federal employment-tax returns, such as on your quarterly IRS Form 941 or your annual IRS Form 944.

Moreover, if you were forced to fully or partially suspend your business operations because of COVID-19, or suffered a significant drop in gross receipts, the CARES Act permits you to claim a refundable tax credit for qualified wages paid to employees. This refundable tax credit is called the “employee retention credit.”

You don’t have to wait until your federal tax returns are due to claim these credits, as you can claim them faster by reducing your employment tax deposits to the IRS. You may also be able to apply for advance payment of your tax credits via IRS Form 7200.

Background on Form 7200

On March 31, 2020, the IRS released Notice 2020-22, which allows eligible employers to immediately claim their anticipated FFCRA paid leave credits and CARES Act employee retention credits. Employers who choose not to claim their tax credits immediately will receive them when they file their quarterly or annual federal tax returns with the IRS.

Eligible employers can take advantage of the credits immediately by reducing their applicable  federal employment-tax deposits — which are due to the IRS monthly or semiweekly, depending on the employer’s payment schedule. Applicable employment tax deposits include federal income tax withheld from employees’ wages plus employer and employee share of Social Security and Medicare taxes.

Eligible employers can take advantage of the credits immediately by reducing their applicable  federal employment-tax deposits — which are due to the IRS monthly or semiweekly.

If the employer’s tax deposits exceed their tax credits, they can wait to receive a refund when they claim the credits on their federal tax return. Or, they can ask the IRS for an advance payment of the credits by completing and submitting Form 7200.

How much are the credits?

The FFCRA tax credit is 100% of the amount of FFCRA paid sick and family leave provided to employees from April 1, 2020 to Dec. 31, 2020 — up to the per-employee limits, as defined by the FFCRA. Note that employers with fewer than 500 employees must abide by the FFCRA’s paid leave provisions.

The CARES Act employee retention credit is 50% of qualified wages (up to $10,000) paid to employees between March 13, 2020 and Dec. 31, 2020. Employers are eligible for the  employee retention credit if their operations were fully or partially suspended because of COVID-19, or if their gross receipts declined by more than 50% compared to the same quarter in the previous year.

How does the advance payment work?

Let’s say you’re entitled to a credit of $6,000 for qualified sick leave payments and are required to make an employment tax deposit of $9,000. You can reduce your employment tax deposit by $6,000 and pay the remaining $3,000 on your next regular deposit date. In this case, you would not submit Form 7200.

However, if your qualified sick leave credit is $10,000 and you’re required to make an employment tax deposit of $7,000, you can apply for an advance payment of the remaining credit ($3,000) via Form 7200.

Same process goes for the employee retention credit.

When later completing your federal tax return (such as your quarterly Form 941), you must reconcile your employment tax deposits with your claimed credits.

Who can file Form 7200?

Employers can file Form 7200 if they meet the FFCRA and the CARES Act criteria and are required to file IRS Form(s) 941, 944, 943, or CT-1.

When and how should employers file Form 7200?

According to the IRS, “You 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 you paid the qualified wages.”

Fax the form to the IRS at 855-248-0552, as stated in the agency’s Instructions for Form 7200.

If your payroll service provider handles your employment tax obligations, they can help you receive the COVID-19 tax credits you’re entitled to plus file Form 7200 (if necessary).

When will employers receive the advance payment?

It can take the IRS up to 2 weeks to process your Form 7200. The advance payment will be issued directly to you, the common-law employer — regardless of whether you use a third party payer, such as a payroll service provider.

The IRS has begun sending Letter 6312 to employers whose Form 7200 has been rejected because of missing or inaccurate information, or because they had to fix a calculation error on the submitted form. The letter will state the reason for the rejection, or if applicable, the corrected advance payment amount.

Preventing Form 7200 filing mistakes

The IRS has posted tips for avoiding common errors when completing Form 7200. Per the IRS:

  • Make sure your Employer Identification Number (EIN) is correct.
  • Select only one box for the “Applicable calendar quarter.”
  • Select only one box for Part 1, Line A — to indicate which employment tax return form you will file for 2020 (e.g. Form 941 or 944).
  • Fill out Part 1, Line B — to indicate whether this is a new business that started on or after Jan. 1, 2020. Check either “Yes” or “No.”
  • Complete all 8 lines of Part 2 to figure the tax credits you’re entitled to and the advance payment you’re requesting. For each line, use an actual dollar amount.
  • Double-check your math — especially lines 4, 7, and 8.
  • Sign the form, as failure to sign will lead to an automatic rejection.

For more information on claiming advance payment of your COVID-19 tax credits, see the Instructions for Form 7200 or consult with your payroll service provider or a tax professional.

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