Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: Special Issues for Employers — Use of Third-Party Payers

 

Note: These FAQs address the tax credits available under the American Rescue Plan Act of 2021 (the "ARP") by employers with fewer than 500 employees and certain governmental employers without regard to the number of employees ("Eligible Employers") for qualified sick and family leave wages ("qualified leave wages") paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, as well as the equivalent credits available for certain self-employed individuals. For information about the tax credits that may be claimed for qualified leave wages paid with respect to leave taken by employees prior to April 1, 2021, under the Families First Coronavirus Response Act ("FFCRA") and the COVID-related Tax Relief Act (the "Relief Act"), see Tax Credits for Paid Leave Under the Families First Coronavirus Response Act for Leave Prior to April 1, 2021 FAQs.

Although the requirement that Eligible Employers provide leave under the Emergency Paid Sick Leave Act ("EPSLA") and Emergency Family and Medical Leave Expansion Act ("Expanded FMLA") under the FFCRA does not apply after December 31, 2020, the tax credits under sections 3131 through 3133 of the Internal Revenue Code ("the Code") are available for qualified leave wages an Eligible Employer provides with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, if the leave would have satisfied the requirements of the EPSLA and Expanded FMLA, as amended for purposes of the ARP.

Throughout these FAQs, the use of the word "work," unless otherwise noted, is inclusive of telework.

83. Can a common law employer that is an Eligible Employer that uses a third-party to report and pay employment taxes to the IRS get the paid sick and family leave credits? (added June 11, 2021)

Yes. A common law employer that is an Eligible Employer is entitled to the credits regardless of whether it uses a third-party payer (such as a reporting agent, payroll service provider, PEO, CPEO, or section 3504 agent) to report and pay its federal employment taxes. The third-party payer is not entitled to the tax credits with respect to the wages it remits on the common law employer's behalf (regardless of whether the third-party is considered an "employer" for other purposes of the Code). If a common law employer uses a third-party to file, report, and pay employment taxes, different rules will apply depending on the type of third-party payer the common law employer uses for claiming/reporting the paid sick and family leave credits.

If a common law employer is an Eligible Employer that uses a reporting agent to file its federal employment tax returns, the reporting agent will need to reflect the tax credits for qualified leave wages on the federal employment tax returns it files on the common law employer's behalf.

If a common law employer is an Eligible Employer that uses a CPEO or a section 3504 agent that received its designation as an agent by submitting Form 2678, Employer/Payer Appointment of Agent PDF, to report its federal employment taxes on an aggregate Form 941, Employer's Quarterly Federal Tax Return PDF, the CPEO or section 3504 agent will report the tax credits for qualified leave wages on its aggregate Form 941 and Schedule R, Allocation Schedule for Aggregate Form 941 Filers PDF, that it already files. A common law employer that is an Eligible Employer can submit its own Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF to claim the advance credit. If it does so, the common law employer will need to provide a copy of the Form 7200 to the CPEO or section 3504 agent so the CPEO or section 3504 agent can properly report the paid sick and family leave credits on the Form 941.

If a common law employer is an Eligible Employer that uses a non-certified PEO or other third-party payer (other than a CPEO or section 3504 agent that submitted Form 2678) that reports and pays the common law employer's federal employment taxes under the third-party's Employer Identification Number (EIN), the PEO or other third-party payer will need to report the tax credits for qualified leave wages on an aggregate Form 941 and separately report the tax credits for qualified leave wages allocable to the common law employers for which it is filing the aggregate Form 941 on an accompanying Schedule R. The PEO or other third-party payer does not have to complete Schedule R with respect any common law employer for which it is not claiming tax credits for qualified leave wages. The common law employer will need to provide a copy of any Form 7200 that it submitted for an advance payment of the credit to the PEO or other third-party payer so the PEO or other third-party payer can properly report the tax credits for qualified leave wages on the Form 941. These rules are similar to the rules that apply with respect to the payroll tax election available under section 41(h) of the Code for the credit for certain research and development expenses

84. May a payroll reporting agent sign and submit Form 7200 on behalf of a client employer? (added June 11, 2021)

Yes. A payroll reporting agent may sign Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF for a client employer for which it has the authority, via Form 8655, Reporting Agent Authorization PDF, to sign and file the federal employment tax return. The signatory must be the Principal or Responsible Official listed on the reporting agent's e-file application. The signatory may sign with ink on paper or may use an alternative signature method (rubber stamp, mechanical device, or computer software program; for details and required documentation, see Rev. Proc. 2005-39 PDF, 2005-28 I.R.B. 82). Consistent with Rev. Proc. 2005-39 PDF, an alternative signature must be in the form of a facsimile signature.

The signatory for the reporting agent must sign, date, and print the signatory's name in the relevant boxes on Form 7200. In the box, "Printed Title," the signatory must include the reporting agent company name or name of business as it appeared on line 9 of the Form 8655. If the reporting agent company name or name of business from the Form 8655 is missing, the Form 7200 cannot be processed.

The reporting agent must obtain written authorization from the client employer (paper, fax, or e-mail) to perform these actions regarding the Form 7200. The reporting agent need not submit that authorization to the IRS but should retain it in its files so that the reporting agent can furnish it to the IRS upon request.

For a client employer for which a third-party does not have a Reporting Agent Authorization, the third-party may complete and print the Form 7200, or it may provide the client employer a means to complete and print the form, but the client employer will have to sign it.

85. What information must third-party payers obtain from their client employers to claim the paid sick and family leave credits on their client employer's behalf? (added June 11, 2021)

If a third-party payer (CPEO, PEO, or section 3504 agent) is claiming the paid sick and family leave credits on behalf of the client employer, it must collect from the client employer any information necessary to accurately claim the credit on its client employer's behalf. This includes obtaining information with respect to the client employer's claims for credits under section 45S the Code and the employee retention credit under section 2301 of the CARES Act or section 3134 of the Code. For more information on the information needed to claim the paid sick and family leave credits, see "What additional records should an Eligible Employer maintain to substantiate eligibility for the paid sick leave or paid family leave credit?"

86. When should the name and EIN of a third-party payer be included on Form 7200? (added June 11, 2021)

Common law 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 any third-party payer they use to file their federal employment tax returns (such as the Form 941, Employer's Quarterly Federal Tax Return PDF) 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 a common law 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 a common law employer's behalf using the common law employer's name and EIN and not the name and EIN of the third-party payer, the common law 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.

87. If a common law employer uses a third-party payer for only a portion of its workforce, should it list the third-party payer on the Form 7200? (added June 11, 2021)

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 a federal employment tax return for the wages it paid to the common law employer's employees under its name and EIN, and the common law employer files a federal 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 federal employment tax return and wages paid to other employees by a third-party payer that will be reported on the third-party payer's federal 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 common law 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 and reconciliation of advance payment of the credits to the federal employment tax return when a common law employer uses a third-party payer such as a CPEO, PEO, or other section 3504 agent for only a portion of their 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 federal 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 federal employment tax return.

See also "If a common law employer that is an Eligible 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?" earlier in these FAQs.

88. What information must third-party payers obtain from their client employers to claim the paid sick and family leave credits on their client's behalf? (added June 11, 2021)

If a third-party payer (such as a CPEO, PEO, or other section 3504 agent) is claiming the paid sick and family leave credits on behalf of the client employer, it must collect from the client employer any information necessary to accurately claim the paid sick and family leave credits on its client employer's behalf. The client employer and the third-party payer will each be liable for employment taxes that are due as a result of any improper claim of the paid sick and family leave credits. This liability will be determined in accordance with liability under the Internal Revenue Code and applicable regulations for the employment taxes reported on the federal employment tax return filed by the third-party payer on which the credits were claimed.

89. Must third-party payers obtain records from their client employers to substantiate the client employer's eligibility for the paid sick and family leave credits? (added June 11, 2021)

If a third-party payer is claiming the paid sick and family leave credits on behalf of the client employer, it must, at the IRS's request, be able to obtain from the client employer and provide to the IRS records that substantiate the client employer's eligibility for the paid sick and family leave credits. Records substantiating the client employer's eligibility for the paid sick and family leave credits must be maintained, either by the third-party payer or the client employer. A client employer, or a third-party payer that is claiming the credit on behalf of a client, must, at the IRS's request, provide to the IRS records that substantiate eligibility for the credit. The premium payee and the third-party payer will be liable for employment taxes that are due as a result of any improper claim of credits in accordance with their liability under the Code and applicable regulations for the employment taxes reported on the federal employment tax return filed by the third-party payer on which the credits were claimed.

90. Are client employers responsible for avoiding a "double benefit" with respect to the paid sick and family leave credits and the credit under sections 45A, 45P, 45S, 51, and 3134 of the Code, as well as section 2301 of the CARES Act? (added June 11, 2021)

Yes. The client employer is responsible for avoiding a "double benefit" with respect to the paid sick and family leave credits and the credit under sections 45A, 45P, 45S, 51, and 3134 of the Code, as well as section 2301 of the CARES Act. The client employer cannot use wages that were used to claim the paid sick and family leave credits, and reported by the third-party payer on the client employer's behalf, to claim credits under the sections 45A, 45P, 45S, 51, or 3134 of the Code, as well as section 2301 of the CARES Act.

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