73. May An Eligible Employer Reduce Its Federal Employment Tax Deposit By The Qualified Wages That It Has Paid Without Incurring A Failure To Deposit Penalty?

September 29, 2022

Frequently asked question #73 “May an Eligible Employer reduce its federal employment tax deposit by the qualified wages that it has paid without incurring a failure to deposit penalty?” under the How to Claim the Employee Retention Credit section of FAQs: Employee Retention Credit under the CARES Act, provided by the IRS.gov to help business owners understand the ERC program. Information is below for the question #73 May an Eligible Employer reduce its federal employment tax deposit by the qualified wages that it has paid without incurring a failure to deposit penalty?

ERC Credit Frequently Asked Question #73:

How to Claim the Employee Retention Credit FAQs

73. May an Eligible Employer reduce its federal employment tax deposit by the qualified wages that it has paid without incurring a failure to deposit penalty?

Yes. An Eligible Employer that pays qualified wages in a calendar quarter will not be subject to a penalty under section 6656 of the Internal Revenue Code (the “Code”) for failing to deposit federal employment taxes if:

  1. the Eligible Employer paid qualified wages to its employees in the calendar quarter before the required deposit,
  2. the total amount of federal employment taxes that the Eligible Employer does not timely deposit, reduced by (a) any amount of the employer’s share of social security tax deferred under section 2302 of the CARES Act, and (b) any amount of federal employment taxes not deposited in anticipation of the credits claimed for paid sick and/or family leave under the FFCRA, is less than or equal to the amount of the Eligible Employer’s anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit, and
  3. the Eligible Employer did not seek payment of an advance credit by filing Form 7300, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.

For more information, about the relief from the penalty for failure to deposit federal employment taxes on account of qualified wages, see Notice 2020-22 PDF and FAQs addressing the deferral of the deposit of all of the employer’s share of social security taxes under section 2302 of the CARES Act and the reduction in deposits for credits, Deferral of employment tax deposits and payments through December 31, 2020.

Example: Employer F is an Eligible Employer that does not receive a Paycheck Protection Program loan. In its first payroll period of the second quarter of 2020, Employer F pays $10,000 in qualified wages and $3,500 in qualified sick and family leave wages under the FFCRA, among other wages for the payroll period. 

Employer F has a federal employment tax deposit obligation of $9,000 for the first payroll period of the second quarter of 2020 (of which $1,500 relates to the employer’s share of social security tax) prior to (a) any deferral of the deposit of the employer’s share of social security tax under section 2302 of the CARES Act and (b) any amount of federal employment taxes not deposited in anticipation of credits for qualified sick and family leave wages under the FFCRA. 

Employer F reasonably anticipates a $5,000 Employee Retention Credit (50 percent of qualified wages) and a $3,500 credit for paid sick and family leave (100 percent of qualified sick and family leave wages) thus far for the second quarter.

Employer F first defers deposit of the $1,500 employer’s share of social security tax under section 2302 of the CARES Act. This preliminarily results in a remaining federal employment tax deposit obligation of $7,500. 

Employer F then reduces this federal employment tax deposit obligation by the $3,500 anticipated credit for qualified sick and family leave wages, leaving a federal employment tax deposit obligation of $4,000. 

Finally, Employer F further reduces the deposit of all remaining federal employment taxes by $4,000 for the $5,000 anticipated Employee Retention Credit for qualified wages. Employer F will not incur a failure to deposit penalty under section 6656 of the Code for reducing its federal employment tax deposit for the first payroll period of the second quarter to $0.

The amount of the excess $1,000 in Employee Retention Credit available is refundable as an overpayment. Employer F may file a Form 7300 to request a credit or refund of this amount in advance of the close of the quarter (but not for any amount of the Employee Retention Credit that was already used to reduce the deposit obligation). 

If Employer F does not request an advance, it may request that the $1,000 overpayment be credited or refunded when it files its second quarter Form 941, Employer’s Quarterly Federal Tax Return.

Employer F may defer payment of the $1,500 employer’s share of social security tax (along with any other employer social security tax imposed under section 3111(a) for the quarter) on its Form 941 for the second quarter of 2020. 

Employer F will not be required to pay any portion of the deferred amount until December 31, 2021, at which time 50 percent is due ($750), with the remaining amount ($750) due December 31, 2022. 

If Employer F fails to pay the required amounts at those times, Employer F’s deferred deposits will lose their deferred status and may be subject to failure to deposit penalties from their original due dates. Employer F may also be subject to failure to pay penalties accruing from the deferred due date for payment.

For more Internal Revenue Service (IRS) Department of the Treasury Employee Retention Credit (ERC) How to Claim the Employee Retention Credit FAQs, visit the official IRS.gov tax website.

Conclusion and Summary on ERC Credit FAQ #73. May an Eligible Employer reduce its federal employment tax deposit by the qualified wages that it has paid without incurring a failure to deposit penalty?

The “May an Eligible Employer reduce its federal employment tax deposit by the qualified wages that it has paid without incurring a failure to deposit penalty?” is Frequently Asked Question #73 of many commonly asked questions small business owners are wondering about how to file the Employee Retention Tax Credit (ERTC). The IRS ERC Tax Credit program is a confusing and complex process to determine the correct ERC calculations your business qualifies for. Answers to “May an Eligible Employer reduce its federal employment tax deposit by the qualified wages that it has paid without incurring a failure to deposit penalty?” and filling out form 941-X may change slightly from frequently updated rules and regulations from the IRS. Leave a comment below if you have further questions on ERC Credit FAQ #73.

Help Completing / Filing / Claiming the Employee Retention Credit (ERC)

Receive Up to a $26,000 ERC Credit from the IRS Per Employee

Disaster Loan Advisors can assist your business with the complex and confusing Employee Retention Credit (ERC), Form 941-X, and the Employee Retention Tax Credit (ERTC) program. 

Depending on eligibility, business owners and companies can receive up to $26,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.

The ERC / ERTC Tax Credit Program is a valuable IRS tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.

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Schedule Your Free Employee Retention Credit Consultation to see what amount of employee retention tax credit your company qualifies for.

Cover Image Credit: Irs.gov / ERC FAQ / Disaster Loan Advisors.

Mark Monroe
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