United States

Penalty relief for failure to deposit employment taxes

TAX ALERT  | 

The IRS released Notice 2020-22, which grants penalty relief for failure to deposit employment taxes, including deposits of withheld income taxes, taxes under Federal Insurance Contributions Act (FICA) and taxes under the Railroad Retirement Tax Act (RRTA), to the extent the employer is entitled to refundable tax credits provided under the Families First Coronavirus Response Act (Families First Act) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Please see RSM Tax Alert issued on March 19, 2020, discussing the employment tax provisions of the Family First Act and RSM Tax Alert issued on March 26, 2020, discussing the employment tax provisions of the CARES Act.  

Under the Families First Act, employers may be required to pay qualified sick leave wages, qualified family leave wages and qualified health plan expenses allocable to the qualified sick and family leave wages. Employers who make such payments are eligible for refundable tax credits under the act. Under the CARES Act, employers experiencing a full or partial business suspension due to orders from a governmental authority due to the coronavirus disease 2019 (COVID-19) or experiencing a statutorily specified decline in business may be paying qualified retention wages. Employers who pay these wages are eligible for a refundable tax credit of up to 50% of the qualified retention wages, including allocable qualified health expenses, limited to $10,000 per employee over all calendar quarters combined. Under Notice 2020-22, the employment taxes that would have been deposited, can be used to pay these wages without incurring a penalty under section 6656 (penalty for failing to deposit). 

Specifically, section 3 of IRS Notice 2020-22 provides section 6656 penalty relief from failure to timely deposit penalties on employment taxes for the payment of qualified sick leave wages and qualified family leave wages, in a calendar quarter if—

  1. The employer paid qualified wages 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 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, Advance Payment of Employer Credits Due to COVID-19, with respect to the anticipated credits it relied upon to reduce its deposits. 

In addition, section 3 of IRS Notice 2020-22 provides section 6656 penalty relief from failing to deposit employment taxes relating to qualified retention wages in a calendar quarter if—

  1. The employer paid qualified retention wages 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 is less than or equal to the amount of the employer’s anticipated credits under section CARES Act 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, Advance Payment of Employer Credits Due to COVID-19, with respect to the anticipated credits it relied upon to reduce its deposits.

The penalty waiver provisions announced in this notice apply to employment tax deposits reduced in anticipation of refundable tax credits pertaining to qualified sick leave wages, qualified family leave wages and allocable qualified health care expenses for the period beginning April 1, 2020 and ending Dec. 31, 2020. With respect to employment taxes reduced in anticipation of refundable tax credits pertaining to qualified retention wages, the penalty waiver applies to the period beginning on March 13, 2020 and ending Dec. 31, 2020. 

Please contact the Washington National Tax Office for any questions about these limited penalty relief provisions.

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