United States

Extended penalty relief for failure to deposit employment taxes

TAX ALERT  | 

The IRS released Notice 2021-24, which amplifies Notice 2020-22, and extends penalty relief for failure to deposit employment taxes1 reduced in anticipation of paid sick and family leave credit and employee retention credit.  Please see prior RSM Tax Alert for a discussion of the initial penalty relief. Notice 2021-24 also includes penalty relief for reduced deposits for COBRA continuation coverage premiums. Generally, section 6656 imposes a penalty for any failure to deposit required amounts by the prescribed due dates, unless the failure is due to reasonable cause and not due to willful neglect.  The extended penalty relief granted in Notice 2021-24 is limited to employment taxes reduced for the following credits. 

Paid Sick and Family Leave Credit

The Families First Coronavirus Response Act (Families First Act) required certain employers to provide paid sick leave and expanded family and medical leave (qualified leave wages) to employees unable to work or telework due to certain COVID-19 related circumstances through Dec. 31, 2020. Employers that did so, along with qualified health plan expenses allocable to these wages were entitled to refundable tax credits. The COVID-related Tax Relief Act of 2020 (Tax Relief Act) did not extend the requirement to pay qualified leave wages and qualified health plan expense, but did extend the refundable tax credits for qualified leave wages and qualified health plan expenses, with modifications, that would have been paid for the period Jan. 1, 2021 through Mar. 31, 2021. The American Rescue Plan Act of 2021(ARP) allows eligible employers to claim refundable tax credits for qualified leave wages with respect to period April 1, 2021 through Sept. 30, 2021. 

Section 3 of IRS Notice 2021-24 provides section 6656 penalty relief from failure to timely deposit penalties on employment taxes reduced for the payment of qualified sick leave wages and qualified family leave wages, in a calendar quarter if—

  1. The employer paid qualified leave wages, qualified health plan expenses, or qualified collectively bargained contributions with respect to the period beginning April 1, 2021 and ending on Sept. 30, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
  2. The amount of employment taxes that the employer does not timely deposit is less than or equal to the amount of the employer’s anticipated refundable credits under Families First Act or sections 3131 and 3132 of the Code for the calendar quarter as of the time of the required deposit, and
  3. The employer did not seek payment of an advance credit by filing Form 7200, with respect to the anticipated credits it relied upon to reduce its deposits. 

Employee Retention Credit 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided for an employee retention credit for eligible employers that paid qualified wages, including certain health plan expenses to some or all employees from March 13, 2020, through Dec. 31, 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), modified aspects of this credit retroactively to March 13, 2020 and also extended the credit for qualified wages paid during the period Jan. 1, 2021 through June 30, 2021. The ARP provides a substantially similar employee retention credit for qualified wages paid July 1, 2021 through Dec. 31, 2021. 

Section 3 of IRS Notice 2021-24 provides section 6656 penalty relief from failure to timely deposit penalties on employment taxes reduced for the payment of qualified retention wages in a calendar quarter if—

  1. The employer paid qualified retention wages with respect to the period beginning Jan.1, 2021, and ending Dec. 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
  2. The amount of employment taxes that the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed for qualified sick leave wages, qualified family leave wages, qualified health plan expenses, and the employer’s share of Medicare tax on the qualified sick and family leave wages under the Families First Act or sections 3131 and 3132 of the Code  is less than or equal to the amount of the employer’s anticipated credits under section CARES Act or 3134 of the Code for the calendar quarter as of the time of the required deposit, and
  3. The employer did not seek payment of an advance credit by filing Form 7200, with respect to the anticipated credits it relied upon to reduce its deposits.

COBRA Continuation Coverage Premium Assistance Credit

The ARP added Internal Revenue Code section 6432, which provides a refundable tax credit for premiums payable for COBRA continuation coverage. The credit is calculated with respect to premiums not paid by eligible employees and is available against an employer’s creditable Medicare taxes for each calendar quarter. This credit applies for the period beginning April 1, 2021, and ending Sept. 30, 2021.  

Section 3 of IRS Notice 2021-24 provides section 6656 penalty relief from failure to timely deposit penalties on employment taxes in a calendar quarter if—

  1. The employer is a “person to whom premiums are payable” under section 6432(b) of the Code, 
  2. The amount of employment taxes that the employer does not timely deposit reduced by the amount of employment taxes not deposited in anticipation of the credits claimed under the Families First Act or sections 3131 and 3132 of the Code, and the credits claimed under the CARES Act or section 3134 of the Code, is less than or equal to the amount of the employer’s anticipated credits under section 6432 of the Code for the calendar quarter as of the time of the required deposits. 
  3. The employer did not seek payment of an advance credit by filing Form 7200, with respect to the anticipated credits it relied upon to reduce its deposits.

Employers who are reducing their employment tax deposits in anticipation of any of the above credits are now protected from the otherwise applicable failure to deposit penalty under section 6656. To assist you in navigating the complex provisions of the penalty relief, consider consulting your tax controversy professionals.

 

1Employment taxes include deposits of withheld income taxes, taxes under the Federal Insurance Contributions act (FICA), and taxes under the Railroad Retirement Tax Act (RRTA).  

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