COVID-19-Related Tax Credits: Special Issues for Employers FAQs

 

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

Taxation and Deductibility of Tax Credits

49. What amount does an Eligible Employer receiving tax credits for qualified leave wages (and allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) need to include in income?

An Eligible Employer must include the full amount of the credits for qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer’s share of the Medicare tax on the qualified leave wages) in gross income.

50. May an Eligible Employer deduct as a business expense an amount paid to an employee for qualified leave wages (and allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) for which it expects to claim the tax credits?

Generally, an Eligible Employer’s payments of qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer’s share of the Medicare tax on the qualified wages) are deductible by the Eligible Employer as ordinary and necessary business expenses in the taxable year that these wages are paid or incurred.  An Eligible Employer may deduct as a business expense the amounts paid to an employee for qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) for which the Eligible Employer expects to claim the tax credits under sections 7001 or 7003 of the FFCRA, if the Eligible Employer is otherwise eligible to take the deduction.

51. Do the tax credits under sections 7001 and 7003 of the FFCRA reduce the amount deductible as federal employment taxes on an Eligible Employer’s income tax return?

Generally, an employer’s payment of certain federal employment taxes is deductible by the employer as an ordinary and necessary business expense in the taxable year that these taxes are paid or incurred, and the amount deductible is generally reduced by credits allowed.  Although the tax credits under sections 7001 and 7003 of the FFCRA are allowed against the Eligible Employer’s portion of the social security tax, the credits are treated as government payments to the employer that must be included in the Eligible Employer’s gross income.  If the employer is otherwise eligible to deduct its portion of the social security tax on all wages, the proper amount deductible by the employer is the amount of federal employment taxes before reduction by the tax credits.

Back to top

Interaction of FFCRA Tax Credits with Other Tax Credits

52. May Eligible Employers receive credits under both section 45S of the Internal Revenue Code and tax credits for qualified leave wages under the FFCRA?

No. There is no double benefit allowed.  Under sections 7001(e)(1) and 7003(e)(1) of the FFCRA, any qualified leave wages taken into account for the tax credits may not be taken into account for purposes of determining a credit under section 45S of the Internal Revenue Code.  Thus, an Eligible Employer may not claim a credit under section 45S with respect to the qualified sick leave wages or qualified family leave wages for which it receives a tax credit under FFCRA, but may be able to take a credit under section 45S with respect to any additional wages paid, provided the requirements of section 45S are met with respect to the additional wages.

Back to top

Use of Third-Party Payers

53. Can an Eligible Employer that uses a third party to report and pay federal employment taxes to the IRS get the credits?

Yes, if an Eligible Employer is otherwise eligible to receive the credits, it (the common law employer) is entitled to the credits, regardless of whether it uses a third party payer (such as a professional employer organization (PEO), certified professional employer organization (CPEO), or agent) to report and pay its federal employment taxes.  The third party payer is not entitled to the credits with respect to the wages it remits on the Eligible Employer’s behalf (regardless of whether the third party is considered an “employer” for other purposes of the Internal Revenue Code (the “Code”)). If an Eligible Employer uses a third party to file, report, and pay federal employment taxes, certain rules for claiming/reporting the credits will apply depending on the type of third party payer the Eligible Employer uses.

If an Eligible Employer uses a CPEO or a 3504 agent to report its federal employment taxes on an aggregate Form 941, Employer's Quarterly Federal Tax Return, the CPEO or 3504 agent will report the credits on its aggregate Form 941 and Schedule R, Allocation Schedule for Aggregate Form 941 Filers, that it already files.  An Eligible Employer can submit its own Form 7200, Advance of Employer Credits Due To COVID-19, to claim the advance credit.  The Eligible Employer will need to provide a copy of the Form 7200 to the CPEO or 3504 agent so the CPEO or 3504 agent can properly report the credit on the Form 941.

If an Eligible Employer uses a non-certified PEO to report and pay its federal employment taxes, the PEO will need to report the credits on an aggregate Form 941 and separately report the credits allocable to the employers for which it is filing Form 941 on an accompanying schedule R. The PEO does not have to complete Schedule R with regard to employers for which it is not claiming a credit.  The Eligible Employer will need to provide a copy of any Form 7200 that it submitted for an advance to the PEO so it can properly report the credit on the Form 941.   These rules are similar to the rules that apply with regard to the payroll tax election available under section 41(h) of the Code for the credit for certain research and development expenses.

Back to top

Other Issues

54. Can employees make salary reduction contributions from the amounts paid as qualified leave wages for their employer sponsored health plan, a 401(k) or other retirement plan, or any other benefits?

The FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee’s standpoint as a taxpayer; thus, the same rules that generally apply to an employee’s regular wages (or compensation, for RRTA purposes) would apply from the employee’s standpoint.  To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.

55. Should Eligible Employers withhold federal employment taxes on qualified leave wages paid to employees?

Yes.  Qualified leave wages are wages subject to withholding of federal income tax and the employee’s share of social security and Medicare taxes.  Qualified leave wages are also considered wages for purposes of other benefits that the Eligible Employer provides, such as contributions to 401(k) plans.

56. May a tax-exempt employer receive the credits?

Yes.  The FFCRA entitles Eligible Employers that pay qualified sick leave wages and qualified family leave wages to refundable tax credits.  Qualified sick leave wages and qualified family leave wages are those wages for paid sick leave and paid family and medical leave that are required to be paid under the FFCRA.  Tax-exempt organizations that are required to provide such paid sick leave or expanded paid family and medical leave may claim the tax credits.

 

Back to FAQ Menu