8557 / What penalty relief is provided for employers who withhold payroll tax deposits in light of the employee retention tax credit and the paid leave credit?

For purposes of the credits, employment taxes include Social Security taxes, Medicare taxes and federal income tax withholding under Section 3402. See Q on the FFCRA paid leave requirements. See Q for more information on the employee retention tax credit.¹

Employers eligible for the credit were not subject to a penalty under IRC Section 6656 for failing to deposit employment taxes on qualified retention wages in a calendar quarter if:

(1)  The employer paid qualified retention wages to its employees in the quarter prior to the time of the required deposit,

(2)  The amount of withheld employment taxes, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed for qualified leave wages, qualified health plan expenses, and the employer’s share of Medicare tax on the wages, was less than or equal to the amount of the employer’s anticipated credits under the CARES Act for the quarter at the time of the required deposit, and

(3)  The 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 the anticipated credits it relied upon to reduce its deposits.

In other words, after a reduction of a deposit by the amount of credits anticipated for qualified leave wages, an employer could further reduce, without penalty, the employment tax deposit by the amount of qualified retention wages the employer paid in the calendar quarter prior to the required deposit, as long as the employer did not also seek an advance credit with regard to the same amount.

The total amount of any reduction in any required deposit could not exceed the total amount of qualified retention wages in the quarter, minus any amount of qualified retention wages that had been previously used to either: (1) to reduce a prior required deposit in the quarter and obtain the penalty relief or (2) to seek payment of an advance credit.²

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Planning Point: Proposed and temporary IRS regulations make it clear that employers were required to reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. Any refund of credits paid to an employer that exceeded the amount the employer was allowed is an erroneous refund for which the IRS will seek repayment.³

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