IRS issues guidance providing payroll relief to employers covered by Families First Act
In a guidance document issued on its website, the IRS announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees.
This is a change from the Families First Act provisions, which stated that employers who pay out paid leave would not be able to recover the tax credits until the next quarter following the leave payment, causing many employers to worry they would be out of business before the time came to collect the credits.
Companies make payroll deposits around a payroll date; how long after payroll depends on the size of the company. Most companies will make deposits at least twice a month. Those deposits consist of three items:
- Employer's share of payroll taxes (7.65% of comp, at least until the taxable wage base has been met).
- Employee's share of payroll taxes (same as employer's share).
- Federal income taxes withheld (e.g., 20% of compensation on average).
What the IRS is saying is that the company will be permitted to keep and not deposit those three amounts (lumping together the deposits for all employees for that payroll period) to the extent of any COVID-19 paid-time-off compensation paid during that payroll period. If the paid time off is greater than the payroll tax deposit, the company can file a claim for reimbursement with the IRS. The IRS says its goal is to provide reimbursement within 2 weeks. Of course, the extent that this helps small businesses will depend on the size of the workforce maintained during this period. If most workers are furloughed or laid off, then it seems likely these provisions will largely not apply.
Notably, the new CARES Act that was passed by the Senate late on March 25, 2020, codifies this IRS guidance. Section 3606 is entitled “Advance Refunding of Credits,” and provides that certain penalties associated with failure to make ordinary deposits shall be waived where the failure was due to the anticipation of the payroll tax credits provided by the Families First Act.
Our tax team has partnered with our COVID-19 Task Force to assist employers with questions related to these provisions. Please contact a member of the Task Force if your business needs guidance.
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