How to Claim the Credits

 

Note that the American Rescue Plan Act of 2021, enacted March 11, 2021, amended and extended the tax credits (and the availability of advance payments of the tax credits) for paid sick and family leave for wages paid with respect to the period beginning April 1, 2021, and ending on September 30, 2021. These FAQs do not currently reflect the changes made by the American Rescue Plan Act; however, please continue to check IRS.gov for any updates related to the change in law.

37. How does an Eligible Employer claim the refundable tax credits for qualified leave wages (plus any allocable qualified health plan expenses and the amount of the Eligible Employer’s share of Medicare tax)? (Updated January 28, 2021)

Eligible Employers report their total qualified leave wages for each calendar quarter on their federal employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return PDF. Employers also report any qualified wages for which they are entitled to an Employee Retention Credit under the CARES Act on Form 941. The Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the Eligible Employer’s share of Social Security and Medicare taxes.

In anticipation of receiving the credit, Eligible Employers can cover the amount of qualified leave wages by (1) accessing federal employment taxes, including withheld taxes that would otherwise be required to be deposited with the IRS, and (2) requesting an advance of the credit from the IRS for the amount of the credit that is not covered by accessing the federal employment tax deposits, by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF.

Prior to retaining deposits in anticipation of the credit, Eligible Employers are permitted to defer the deposit and payment of the employer's share of social security tax under section 2302 of the CARES Act. For more information, see Deferral of employment tax deposits and payments through December 31, 2020. In addition, employers may opt to defer withholding and payment of the employee's share of social security tax under Notice 2020-65 PDF, as modified by Notice 2021-11 PDF, on certain wages paid between September 1, 2020 through December 31, 2020.

38. Can an Eligible Employer that pays qualified leave wages cover these payments before receiving the credits by reducing its federal employment tax deposits? (Updated January 28, 2021)

An Eligible Employer may cover the qualified leave wages (and allocable qualified health plan expenses and the Eligible Employer's share of Medicare tax on the qualified leave wages) by accessing federal employment taxes, including those that the Eligible Employer already withheld, that are set aside for deposit with the IRS (reduced by any amount of the employer's share of social security tax deferred under section 2302 of the CARES Act or any amount of the employee's share of social security tax that the employer opted to defer under Notice 2020-65 PDF, as modified by Notice 2021-11 PDF), for all wage payments made during the same quarter as the qualified leave wages.

That is, an Eligible Employer that pays qualified leave wages to its employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter may, after deferring the employer's and employee's share of social security tax under section 2302 of the CARES Act and Notice 2020-65, as modified by Notice 2021-11 PDF, respectively, reduce the amount of federal employment taxes it deposits for that quarter by the amount of the qualified leave wages (and allocable qualified health plan expenses and the Eligible Employer's share of Medicare tax on the qualified leave wages) paid in that calendar quarter. The Eligible Employer must account for the reduction in deposits on the Form 941, Employer's Quarterly Federal Tax Return PDF, for the quarter.

Example: In the second quarter of 2020, an Eligible Employer that did not claim the Employee Retention Credit paid $5,000 in qualified sick leave wages and qualified family leave wages (and allocable health plan expenses and the Eligible Employer's share of Medicare tax on the qualified leave wages) and is otherwise required to deposit $10,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter as the $5,000 in qualified leave wages was paid. The Eligible Employer defers $2,000 for its share of social security tax under section 2302 of the CARES Act. The Eligible Employer may keep up to $5,000 of the remaining $8,000 of taxes the Eligible Employer was going to deposit, and it will not owe a penalty for keeping the $5,000. The Eligible Employer is then only required to deposit the remaining $3,000 on its required deposit date. The Eligible Employer will later account for the $5,000 it retained when it files Form 941, Employer's Quarterly Federal Tax Return PDF, for the quarter.

For more information about relief under the FFCRA from failure to deposit penalties for failure to timely deposit certain federal employment taxes, see Notice 2020-22 PDF and "May an Eligible Employer reduce its federal employment tax deposit by the qualified leave wages that it has paid without incurring a failure to deposit penalty?"

39. May an Eligible Employer reduce its federal employment tax deposits to cover qualified leave wages that it has paid without incurring a penalty for failing to deposit federal employment taxes? (Updated January 28, 2021)

Yes.  An Eligible Employer that pays qualified leave wages in a calendar quarter will not be subject to a penalty under section 6656 of the Internal Revenue Code (the “Code”) for failing to deposit federal employment taxes if:

  1. the Eligible Employer paid qualified leave wages to its employees in the calendar quarter before the required deposit,
  2. the total amount of federal employment taxes that the Eligible Employer does not timely deposit (reduced by any amount of the employer's and employee's share of social security tax deferred under section 2302 of the CARES Act and Notice 2020-65, as modified by Notice 2021-11, respectively) is less than or equal to the amount of the Eligible Employer's anticipated credit for the qualified leave wages for the calendar quarter as of the time of the required deposit, and
  3. the Eligible 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 any portion of the anticipated credits it relied upon to reduce its deposits.

For more information, about the relief from the penalty for failure to deposit federal employment taxes on account of qualified wages, see Notice 2020-22 PDF, FAQs addressing the deferral of the deposit of all of the employer's share of social security tax under section 2302 of the CARES Act and the reduction in deposits for credits, "Deferral of employment tax deposits and payments through December 31, 2020." In addition, employers may opt to defer withholding and payment of the employee's share of social security tax under Notice 2020-65 PDF, as modified by Notice 2021-11 PDF, on certain wages paid between September 1, 2020 through December 31, 2020.

Example: In its first payroll period of the second quarter of 2020, Employer F pays $10,000 in qualified wages for purposes of the Employee Retention Credit and $3,500 in qualified sick and family leave wages under the FFCRA, among other wages for the payroll period. Employer F has a federal employment tax deposit obligation of $9,000 for the first payroll period of the second quarter of 2020 (of which $1,500 relates to the employer's share of social security tax) prior to (1) any deferral of the deposit of the employer's share of social security tax under section 2302 of the CARES Act and (2) any amount of federal employment taxes not deposited in anticipation of credits for qualified sick and family leave wages under the FFCRA. Employer F reasonably anticipates a $5,000 Employee Retention Credit (50 percent of qualified wages) and a $3,500 credit for paid sick and family leave (100 percent of qualified sick and family leave wages) thus far for the second quarter.

Employer F first defers deposit of the $1,500 employer's share of social security tax under section 2302 of the CARES Act. This preliminarily results in a remaining federal employment tax deposit obligation of $7,500. Employer F then reduces this federal employment tax deposit obligation by the $3,500 anticipated credit for qualified sick and family leave wages, leaving a federal employment tax deposit obligation of $4,000. Finally, Employer F further reduces the deposit of all remaining federal employment taxes by $4,000 for the $5,000 anticipated Employee Retention Credit for qualified wages.

Employer F will not incur a failure to deposit penalty under section 6656 of the Code for reducing its federal employment tax deposit for the first payroll period of the second quarter to $0.

The amount of the excess $1,000 in Employee Retention Credit available is refundable as an overpayment. Employer F may file a Form 7200 PDF to request an advance payment of the remaining Employee Retention Credit (but not for any amount of the Employee Retention Credit that was already used to reduce the deposit obligation). If Employer F does not request an advance payment of the credit, it may request that the $1,000 overpayment be credited or refunded when it files its second quarter Form 941, Employer's Quarterly Federal Tax Return. Regardless of whether Employer F requests an advance payment of the credit, Employer F must report all qualified wages, the credit for qualified sick and family leave wages, the Employee Retention Credit, and any advance credit received from Forms 7200 filed for the quarter on the Form 941 for the quarter.

Employer F may defer payment of the $1,500 employer's share of social security tax (along with any other employer social security tax imposed under section 3111(a) for the quarter) on its Form 941 for the second quarter of 2020. Employer F will not be required to pay any portion of the deferred amount until December 31, 2021, at which time 50 percent is due ($750), with the remaining amount ($750) due December 31, 2022.

40. How can an Eligible Employer that pays qualified leave wages cover the payment of these wages if the Eligible Employer does not have sufficient federal employment taxes set aside for deposit to cover those payments?  Can the employer get an advance payment of the credits?  (Updated February 4, 2021)

Because quarterly employment tax returns are not filed until after qualified wages are paid, some Eligible Employers may not have sufficient federal employment taxes set aside for deposit to the IRS to cover their qualified leave wages through reduction of the amount to be deposited, particularly after taking into account the permitted deferral of the employer's share of social security tax under section 2302 of the CARES Act and the permitted deferral of the employee's share of social security tax under Notice 2020-65 PDF, as modified by Notice 2021-11 PDF. Accordingly, the IRS has a procedure for obtaining an advance payment of the refundable credits.

The Eligible Employer is permitted to defer the deposit and payment of the employer's share of social security tax under section 2302 of the CARES Act and may do so prior to reducing any deposits in anticipation of the credit. See "Deferral of employment tax deposits and payments through December 31, 2020." The Eligible Employer may also opt to defer the withholding and payment of the employee's share of social security tax in accordance with Notice 2020-65, PDF as modified by Notice 2021-11 PDF. If the remaining employment tax deposits set aside, after taking into account any deferral of the employer's share of social security tax or any amount of the employee's share of social security tax that the employer opted to defer under Notice 2020-65, as modified by Notice 2021-11, are less than the qualified leave wages, the Eligible Employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF, to request an advance payment of the credit for the remaining qualified leave wages it has paid for which it did not have sufficient federal employment tax deposits.

If an Eligible Employer fully reduces its required deposits of federal employment taxes otherwise due on wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and it has not paid qualified leave wages in excess of this amount, it should not file a Form 7200. If it files a Form 7200, it will need to reconcile this advance payment of the credit and its deposits with the qualified wages on Form 941, Employer's Quarterly Federal Tax Return (or other applicable federal employment tax return such as Form 944 PDF or Form CT-1 PDF), beginning with the Form 941 for the second quarter of 2020, and it may have an underpayment of federal employment taxes for the quarter.

Example: During the second quarter of 2020, Employer G paid $10,000 in qualified leave wages and is otherwise required to deposit $8,000 in federal employment taxes on all wages paid, after deferring its employer's share of social security tax under section 2302 of the CARES Act. Employer G has not claimed the Employee Retention Credit for any wages under the CARES Act. Employer G can keep the entire $8,000 of taxes that Employer G was otherwise required to deposit without penalty as a portion of the credits it is otherwise entitled to claim on the Form 941 PDF. Employer G may file a request for an advance payment for the remaining $2,000 by completing Form 7200 PDF.

41. If the qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) exceed the Eligible Employer’s share of social security tax owed for a quarter, how does the Eligible Employer get a refund of the excess credits?  Does this affect what the Eligible Employer puts on its Form 941? (Updated January 28, 2021)

The amount of 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 excess of the Social Security tax the Eligible Employer owes for the quarter is refundable. If the amount of the credits exceeds the Eligible Employer’s share of social security tax, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) or 6413(b) of the Internal Revenue Code. Consistent with its treatment as an overpayment, the excess will be applied to offset any remaining tax liability on the Form 941, Employer's Quarterly Federal Tax Return PDF, and the amount of any remaining excess will be reflected as an overpayment on the Form 941. Like other overpayments of federal taxes, the overpayment will be subject to offset under section 6402(a) of the Code prior to being refunded to the employer.

42. How does an Eligible Employer obtain Form 7200 and where should it send its completed form to receive the advance credit? Is there a minimum advance amount that can be claimed on a Form 7200? (updated July 2, 2020)?

An Eligible Employer may obtain the Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF online and may fax its completed form to 855-248-0552. After July 2, 2020, the minimum advance amount that can be claimed on a Form 7200 is $25. A Form 7200 requesting an advance payment of less than $25 will not be processed. Taxpayers can claim credits of less than $25 on the Form 941 PDF.

42a. Who can sign a Form 7200? Should a taxpayer submit additional documents to confirm that a person is authorized to sign a Form 7200? (Updated January 28, 2021)

The instructions for Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF, provide information on who may properly sign a Form 7200 PDF for each type of entity. For corporations, the instructions provide that the president, vice president, or other principal officer who is duly authorized may sign a Form 7200. For partnerships (including an LLC treated as a partnership) or unincorporated organizations, a responsible and duly authorized partner, member, or officer having knowledge of the entity's affairs may sign a Form 7200. For a single-member LLC treated as a disregarded entity for federal income tax purposes, the instructions provide that the owner or a principal officer who is duly authorized may sign the Form. For trusts or estates, the instructions provide that the fiduciary may sign the Form 7200. Additionally, the instructions provide that a Form 7200 may be signed by a duly authorized agent of the taxpayer if a valid power of attorney has been filed.

In many circumstances, whether the person signing the Form 7200 is duly authorized or has knowledge of the partnership's or unincorporated organization's affairs is not apparent on the Form 7200. To help expedite and ensure proper processing of Forms 7200, if a taxpayer has duly authorized an officer, partner, or member to sign Form 7200 (and that person is not otherwise explicitly permitted to sign the Form 7200 by nature of their job title), the taxpayer should submit a copy of the Form 2848, Power of Attorney and Declaration of Representative PDF, authorizing the person to sign the Form 7200 with the Form 7200.

42b. When should the name and EIN of a third-party payer be included on Form 7200? (Updated November 25 2020)

Employers who file Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF to claim an advance payment of credits are required to include on the form the name and EIN of the third-party payer they use to file their federal employment tax returns (such as the Form 941) if the third-party payer uses its own EIN on the federal employment tax returns. This will ensure advance payment of the credits received by the common law employer is properly reconciled to the federal employment tax return filed by the third-party payer for the calendar quarter for which the advance payment of the credits is received.

To help expedite and ensure proper processing of Form 7200 and reconciliation of advance payment of the credits to the federal employment tax return for the calendar quarter, only those third-party payers who will file a federal employment tax return on behalf of an employer using the third-party payer's name and EIN should be listed on the Form 7200. Typically, CPEOs, PEOs, and other section 3504 agents fall into this category of third-party payers.

If a third-party payer will file the federal employment tax return on an employer's behalf using the employer's name and EIN and not the name and EIN of the third-party payer, the employer should not include the name and EIN of the third-party payer on the Form 7200. Typically, reporting agents and payroll service providers fall into this category of third-party payers.

42c. If a common law employer uses a third-party payer for only a portion of its workforce, should the employer list the third-party payer on the Form 7200? (Updated November 25, 2020)

In some cases, a common law employer may use the services of a third-party payer (such as a CPEO, PEO, or other section 3504 agent) to pay wages for only a portion of its workforce. In those circumstances, the third-party payer files an employment tax return (such as the Form 941 PDF) for wages it paid to employees under its name and EIN, and the common law employer files an employment tax return for wages it paid directly to employees under its own name and EIN.

If the common law employer is claiming advance payments of credits for both wages paid directly to employees that will be reported on its own employment tax return and wages paid to other employees by a third-party payer that will be reported on the third-party payer's employment tax return, two separate Forms 7200, Advance Payment of Employer Credits Due to COVID-19 PDF, should be filed: one for the wages paid by the common law employer with the name and EIN of the employer, and one for the wages paid by the third-party payer with the name and EIN of both the common law employer and the third-party payer.

To help expedite and ensure proper processing of Form 7200 PDF and reconciliation of advance payment of the credits to the employment tax return when an employer uses a third-party payer such as a CPEO, PEO, or other section 3504 agent for only a portion of its workforce, a common law employer should include the name and EIN of the third-party payer only on the Form 7200 for advance payment of the credits for wages paid by the third-party payer and reported on the third-party payer's employment tax return. The common law employer should not include the name and EIN of the third-party payer on the Form 7200 for advance payments of the credits claimed for wages paid by the common law employer and reported on the common law employer's employment tax return.

42d. What is the last day taxpayers may submit a Form 7200, Advance Payment of Employer Credits Due to Covid-19, requesting an advance payment of credits? (Updated February 4, 2021)

Taxpayers filing a Form 941, Employer's QUARTERLY Federal Tax Return PDF, may submit a 2021 Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF, up to the earlier of April 30, 2021 or the date they file the Form 941 for the first quarter of 2021.  Taxpayers filing a Form 943, Employer's Annual Federal Tax Return for Agricultural Employees PDF, Form 944, Employer's ANNUAL Federal Tax Return PDF, or Form CT-1, Employer's Annual Railroad Retirement Tax Return PDF, may submit a 2021 Form 7200 up to April 30, 2021. Note that you may not file Form 7200 for any quarter after the earlier of the date you file Form 941 for the quarter, or the due date for the return for that quarter.

43. What if an Eligible Employer does not initially pay an employee qualified leave wages when the employee is eligible for those wages, but pays those wages at a later date?  (Updated January 28, 2021)

An Eligible Employer can claim the credits once it has paid the employee for the period of paid sick leave or expanded family and medical leave, as long as the qualified leave wages relate to leave taken during the period beginning on April 1, 2020, and ending on March 31, 2021.