Businesses and Tax-Exempt Entities Financially Impacted by the Coronavirus

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, was designed to encourage eligible employers to keep employees on their payroll, despite experiencing financial hardship related to the coronavirus pandemic, with an employee retention tax credit (Employee Retention Credit).

The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, and the American Rescue Plan Act, enacted on March 11, 2021, included changes to extend and modify the credit.

• CARES Act – 2020 tax year

For employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and December 31, 2020.

• Consolidated Appropriations Act – 2021 tax year

Employers who qualify, including PPP recipients, can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee per quarter for the first two quarters of 2021.

• American Rescue Plan Act (ARPA)– 2021 tax year

The credit remains at 70% of qualified wages up to a $10,000 limit per quarter so a maximum of $7,000 per employee per quarter for all of 2021. So, an employee could claim $7,000 per quarter per employee or up to $28,000 for 2021.

Under the ARPA, the ERC is available to eligible employers for wages paid during the third and fourth quarters of 2021.

NOTE: The Infrastructure Investment and Jobs Act amended section 3134 of the Internal Revenue Code to limit the availability of the Employee Retention Credit in the fourth quarter of 2021 to taxpayers that are recovery startup businesses, as defined in section 3134(c)(5). Therefore, taxpayers that are not recovery startup businesses are not eligible for the Employee Retention Credit for wages paid after September 30, 2021. 

For more detailed guidance, including information relating to the definitions of qualified wages and eligible employers, as well as information about the applicable gross receipts test, see:

• Employer Tax Credits
• Coronavirus Tax Relief for Businesses and Tax-Exempt Entities
• New law extends COVID tax credit for employers who keep workers on payroll
• IRS provides guidance for employers claiming the Employee Retention Credit for first two quarters of 2021
• Treasury, IRS provide additional guidance to employers claiming the employee retention credit, including for the third and fourth quarters of 2021
• Notice 2021-20
• Notice 2021-23
• Notice 2021-49
• Revenue Procedure 2021-33 –  Treasury and IRS provide gross receipts safe harbor for employers claiming the Employee Retention Credit (provides a safe harbor permitting employers to exclude certain amounts from gross receipts solely for determining eligibility for the ERC. These amounts are:
  • The amount of the forgiveness of a Paycheck Protection Program (PPP) Loan;
  • Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
  • Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.
• Common errors to avoid when filing for advance payment of employer credits
• Early Termination of the Employee Retention Credit, Retaining Employment Tax Deposits in Anticipation of Credits, Shut Down of the Fax Line and Helpful Form 7200 Hints

Frequently Asked Questions:

• Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 for Leave After March 31, 2021
• Tax Credits for Paid Leave Under the Families First Coronavirus Response Act for Leave Prior to April 1, 2021
• Deferral of employment tax deposits and payments through December 31, 2020
• COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs
• DOL Families First Coronavirus Response Act: Questions and Answers
• FAQs: Employee Retention Credit under the CARES Act

Under the Families First Coronavirus Response Act (FFCRA), businesses could claim two refundable payroll tax credits. The paid sick leave credit and paid family leave credit were available for eligible employers who paid qualified sick leave wages and/or qualified family leave wages from April 1, 2020, through December 31, 2020, and who have fewer than 500 employees. See COVID-19-Related Tax Credits for Paid Leave Provided by Small and Midsize Businesses FAQs for more information.

You can get immediate access to the credits by reducing the employment tax deposits you are otherwise required to make. If your employment tax deposits are not enough to cover the credit, you can request advance payment from the IRS by faxing your completed Form 7200, Advance Payment of Employer Credits Due to COVID-19 to 855-248-0552*. Read the instructions carefully and take time when completing this form. For more information call 833-551-3588.

*Note: The Form 7200 fax line will be shut down after January 31, 2022 and IRS will no longer be accepting Form 7200 submissions. See Early Termination of the Employee Retention Credit, Retaining Employment Tax Deposits in Anticipation of Credits, Shut Down of the Fax Line and Helpful Form 7200 Hints for more information.

If you fully reduce your required employment tax deposits otherwise due on wages paid in the same calendar quarter to employees in anticipation of receiving the credits, and you have not paid qualified leave wages in excess of this amount, you should not file Form 7200. If you file Form 7200, you will need to reconcile this advance credit and deposits with the qualified leave wages on Form 941 (or other applicable federal employment tax return such as Form 944 or Form CT-1), and you may have an underpayment of federal employment taxes for the quarter.

Note that a Form 7200 requesting an advance of less than $25 will not be processed. Employers can claim credits of less than $25 on Form 941.

Reporting qualified sick and family leave wages (2021)

Notice 2021-53 provides guidance to employers about reporting on Form W-2 the amount of qualified sick and family leave wages paid to employees for leave taken in 2021. The notice provides guidance under recent legislation, including the Families First Coronavirus Response Act (FFCRA), as amended by the COVID-Related Tax Relief Act of 2020, and the American Rescue Plan Act of 2021. Employers will be required to report these amounts, for 2021, to employees either on Form W-2, Box 14, or in a separate statement provided with the Form W-2, including providing employees who are also self-employed with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities. The guidance also provides employers with model language to use as part of the Instructions for Employee for the Form W-2 or on the separate statement provided with the Form W-2.

See How to Claim the Credits on IRS.gov for more information.

Reporting qualified sick and family leave wages (2020)

Notice 2020-54 provided guidance regarding W-2 reporting of qualified sick leave and family leave under FFCRA for wages paid to employees for leave taken in 2020.

See How to Claim the Credits on IRS.gov for more information.

Some Employers Received Notice of Failure to Deposit Penalty after Claiming New Tax Credits

Although the IRS has taken steps to implement rules that prevent the failure to deposit penalty from incurring on employers reducing their deposits in anticipation of claiming the Sick and Family Leave Credits or Employee Retention Credit, some employers may still have inadvertently received notice of the penalty.

No additional actions are needed at this time. The IRS is working to identify these employer accounts and correct them as soon as possible. To avoid receiving a penalty notice in the future, check IRS.gov/form941 for guidance on properly reporting liabilities when reducing deposits.

Errors Employers Should Avoid When Requesting Advance Payment of Employer Credits

Employers who are filing Form 7200 should read the instructions carefully and take their time when completing this form to avoid mistakes. Using a reputable tax preparer can also help avoid errors. Mistakes can result in a processing delay, which means it may take longer to get the advanced payment. Review this list of common errors.

Form 7200 Processing

You may receive one of the following letters from the IRS as they process Form 7200:

• Letter 6312, if the IRS either rejected Form 7200 or made a change to the requested amount of advance payment due to a computation error. The letter will explain the reason for the rejection or, if the amount is adjusted, the new payment amount will be listed on the letter.
• Letter 6313, if the IRS needs written verification that the address listed on your Form 7200 is the current mailing address for your business. The IRS will not process Form 7200 or change the last known address until the verification is provided.
• Letter 6507, is sent to employers with more than 500 employees who claimed Credit for Qualified Sick and Family Leave Wages in error. Employers receiving Letter 6507 were not eligible for the Credit for Qualified Sick and Family Leave Wages they claimed on an original or amended employment tax return because they had more than 500 employees for the period(s) they claimed the credit.The incorrect credits claimed could include non-refundable and/or refundable portions of Credit for Qualified Sick and Family Leave Wages.

The last day to file Form 7200 to request an advance payment for the fourth quarter of 2021 is the date on which you file your employment tax return for the tax period or January 31, 2022, whichever is earlier. The last date to file Form 7200 is the same whether you file a quarterly Form 941, or an annual Form 943, 944, or CT‐1.

• Please note the Form 7200 fax line will shut down after January 31, 2022 and IRS will no longer be accepting Form 7200 submissions.

Deferral of Employer Social Security Tax Payments

The CARES Act allowed employers, including government employers, to defer the deposit and payment of the employer share of social security tax for deposits and payments due on or after March 27, 2020, and before January 1, 2021, as well as deposits and payments due after January 1, 2021, that were required for wages paid during the quarter ending on December 31, 2020. Payment for one-half of the deferred employer share of social security tax was due by December 31, 2021, and the remainder is due by December 31, 2022.

For more information, see the IRS Deferral of employment tax deposits and payments through December 31, 2020 FAQs.

Deferral of Certain Employee Social Security Tax Withholding and Payment

The President of the United States issued a Presidential Memorandum directing the Secretary of the Treasury to use his authority pursuant to section 7508A of the Internal Revenue Code to defer the withholding, deposit, and payment of certain payroll tax obligations. As a result, the Department of Treasury and the Internal Revenue Service issued guidance allowing employers to defer withholding and payment of the employee’s portion of the Social Security tax, if the employee’s wages or compensation were below a certain amount. Notice 2020-65 made relief available to employers for wages or compensation paid starting September 1, 2020, through December 31, 2020. It applies to payments of taxable wages or compensation to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately.

Payment of Deferred Social Security Tax Withholding

Repayment of the employee’s portion of the deferral started January 1, 2021 and will continue through December 31, 2021. Payments made by January 3, 2022, will be timely because December 31, 2021, is a holiday. The employer should send repayments to the IRS as they collect them. If the employer does not repay the deferred portion on time, penalties and interest will apply to any unpaid balance. Employees should see their deferred taxes in the withholdings from their pay.

For more information, see:

• IR-2020-195, Guidance issued to implement Presidential Memorandum deferring certain employee Social Security tax withholding
• COVID Tax Tip 2021-32, What employers need to know about repayment of deferred payroll taxes
• Notice 2020-65 (PDF)
• Notice 2021-11 (PDF)
• IRS reminder: For many employers and self-employed people, deferred Social Security tax payment due Jan. 3

Business Closures

Closing your business can be a difficult and challenging task. The Taxpayer Advocate Service (TAS) partnered with IRS to expand its Closing a Business page to help business owners understand the specific actions needed, from a federal tax perspective, for each type of business.

More Resources

For more information, see the Coronavirus Tax Relief for Businesses and Tax-Exempt Entities page on IRS.gov. You can also visit the Department of Labor’s website, Families First Coronavirus Response Act: Questions and Answers.