How employers account for recapture of excess employment tax credits

Editor: Sally P. Schreiber, J.D.

The IRS issued temporary and proposed regulations on the recapture of excess employment tax credits under the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The regulations cover the reconciling of advance payments of the acts’ refundable employment tax credits and authorize assessments to recapture the credits, when necessary (T.D. 9904 and REG-111879-20).

Eligible employers are entitled to receive a refundable credit equal to the amount of the qualified sick leave wages and qualified family leave wages they are required to pay under the FFCRA, plus allocable qualified health plan expenses. Subject to certain reductions for other credits, the credit is allowed against the employer’s Social Security taxes and Railroad Retirement Tax Act Tier 1 taxes imposed on all wages and compensation paid to employees.

The CARES Act created an employee retention credit, which eligible employers can claim for paying qualified wages to employees. The employee retention credit is a refundable credit equal to 50% of qualified wages paid, with a maximum credit of $5,000 per employee. The credit is allowed against the employer’s Social Security taxes and Railroad Retirement Tax Act Tier 1 taxes but reduced by the amount of credits claimed under the FFCRA.

Employers can claim the FFCRA credits and the employee retention credit in advance on new Form 7200, Advance Payment of Employer Credits Due to COVID-19.

The FFCRA credits and the employee retention credit are refundable to the extent they exceed the employer’s Social Security taxes and Railroad Retirement Tax Act Tier 1 taxes paid for the quarter.

Employers are required to reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. A refund, a credit, or an advance of any portion of these credits to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund for which the IRS will seek repayment.

Under the temporary and proposed regulations, any erroneous refunds of the credits will be treated as underpayments of the taxpayer’s Social Security or Railroad Retirement taxes. The regulations authorize the IRS to assess any portion of the credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were tax liabilities under Secs. 3111(a) and 3221(a), subject to the IRS’s assessment and administrative collection procedures. These procedures will apply during the normal course of the IRS’s processing of employment tax returns.

The temporary regulations were effective July 29, 2020, the date they were published in the Federal Register.