Under the Internal Revenue Code, an employer would typically be penalized for failing to deposit certain federal employment taxes by the designated deadline. Examples include deposits of withheld income taxes and FICA taxes.
However, the IRS recently provided additional penalty relief for employers who have failed to timely deposit their employment taxes because those deposits were reduced in anticipation of various employment tax credits introduced under laws passed during the COVID-19 pandemic.
Employers paying qualified sick leave wages and qualified family leave wages, as well as qualified health plan expenses allocable to qualified sick and family leave wages, are eligible for refundable tax credits that can be claimed against their employment taxes.
Under the Families First Coronavirus Response Act (FFCRA), the sick and family leave credits were originally scheduled to expire at the end of 2020. However, subsequent legislation — namely the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA) — extended these credits for the first three quarters of 2021.
Additionally, certain employers experiencing a full or partial business suspension because of orders from a governmental authority during the COVID-19 pandemic, or experiencing a statutorily specified decline in business, are also allowed to claim the employee retention tax credit. It applies to up to 50% of qualified wages, including allocable qualified health care expenses, and is limited to $10,000 per employee per calendar quarter.
The employee retention credit was initially scheduled to expire at the end of 2020. However, subsequent legislation — the CARES Act and ARPA — extended this credit through December 31, 2021.
Finally, the ARPA provides a refundable tax credit for premiums payable for COBRA coverage. This credit is calculated with respect to premiums not paid by assistance eligible individuals for COBRA coverage during the period beginning April 1, 2021, and ending September 30, 2021.
The latest relief
The FFCRA, CARES Act, CAA and ARPA instruct the U.S. Secretary of the Treasury to waive the penalty for failure to deposit employment taxes in anticipation of the allowance of the refundable tax credits.
In Notice 2021-24, the IRS recently issued additional relief from failure to deposit penalties. The guidance describes penalty relief to employers who reduce their employment tax deposits in anticipation of receiving the following credits:
- Paid sick and family leave credits with respect to qualified leave wages paid from January 1, 2021, through September 30, 2021,
- The employee retention credit with respect to qualified wages paid beginning January 1, 2021, and ending December 31, 2021, and
- The COBRA credit for coverage from April 1, 2021, and ending September 30, 2021.
Relief from a tax penalty is always welcome news for employers. Contact us for further information about Notice 2021-24 as well as for updates on the latest COVID-related guidance and measures.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.