Tax Alert:   IRS Issues Additional Guidance on
Payroll Tax Credits
March 25, 2020 - Last week, Congress passed the “Families First Coronavirus Relief Act” (“Act”) that requires certain employers with less than 500 employees to provide COVID-19 related sick and family leave to their employees. The Act also provides a refundable payroll tax credit for those employers ( See “ Whitley Penn Tax Alert: “Tax Credits in Coronavirus Relief Act for Employer Sick and Family Leave Benefits ” dated March 20, 2020). The IRS has now issued Information Release (IR) 2020-57 that provides initial guidance regarding how employers may take advantage of those credits.

Under the IRS guidance, employers that pay qualified sick and family leave will be able to reduce their Federal payroll tax deposits by the amount of the leave.   This amount includes Federal income tax withholding and both the employer and employee share of FICA withholding. Any leave payments in excess of payroll tax liabilities are refundable to the employer. Self-employed individuals are also eligible to claim comparable credits on their Federal income tax return and to reduce estimated income tax payments.

If the sick and family leave payments exceed the employer’s Federal payroll taxes, the employer may file a request for an accelerated payment from the IRS. The accelerated payments are expected to be processed by the IRS in two weeks or less. The IRS provides two examples in IR 2020-57:

Example 1 :
If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments.  The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

Example 2 :  
If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

The IRS is expected to issue additional guidance within the next week regarding the application of these rules including procedures that should be utilized to request an accelerated refund payment. In the absence of specific guidance, taxpayers that act reasonably and in good faith to comply with the Act will not be subject to enforcement action.

A small business with less than 50 employees is eligible for an exemption from the sick and family leave rules when the requirements would jeopardize the business’ ability to continue operating as a going concern. The Department of Labor will issue emergency rules to address this issue.

Whitley Penn is continually monitoring the tax and economic developments related to the Coronavirus pandemic and will send out additional alerts in the future. In the interim, please call your Whitley Penn Tax Advisor if you have any questions or need any additional information.