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IRS provides additional penalty relief for payroll tax deposits

Authored by Paul Dillon, Michelle Hobbs and Mike Schiavo

In an effort to provide continuing relief to businesses from the economic impact of the COVID-19 pandemic, the IRS extended penalty relief for certain employers who failed to timely deposit employment taxes.

Certain payroll-related credits enacted in the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act were extended via the Tax Relief Act of 2020 and the American Rescue Plan Act of 2021. Collectively, these Acts allow employers to claim refundable credits to offset employment taxes for qualified sick and family leave wages (FFCRA), actual wages paid to employees during partial or complete government-imposed business suspensions (employee retention credit or “ERC”) as well as qualified health plan expenses allocable to such wages. These credits permit employers to instead use cash to continue paying wages and other costs during government-imposed closures.

Employers reducing their employment tax deposits in anticipation of receipt of any or all of the following credits will not be liable for failure to deposit penalties.

  • Paid sick and family leave credits with respect to qualified leave wages paid from Jan. 1, 2021, through Sept. 30, 2021;
  • The ERC with respect to qualified wages paid beginning Jan. 1, 2021, and ending Dec. 31, 2021; and
  • The COBRA credit for coverage from April 1, 2021, and ending Sept. 30, 2021.

In other words, when making federal payroll deposits, employers may compute the total amount of the employment tax liability and reduce it by the amount of the anticipated payroll tax credits listed above.

The guidance indicates an employer would not be subject to a penalty for failing to deposit employment taxes if specified requirements are met, including that the employer did not seek payment of an advance credit for the anticipated credits it relied on to reduce its deposits. The relief ensures that eligible employers may pay qualified sick leave wages and qualified family leave wages, qualified wages and COBRA continuation coverage premiums using employment taxes that would otherwise be required to be deposited without incurring a failure-to-deposit penalty.

Please see further stimulus coverage on our website for details on these payroll tax credits and other relief programs.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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