Did you recently receive a penalty notice for your payroll tax deposit even though you remitted the correct amount?
You’re not alone. The Internal Revenue Service (IRS) has announced that a “small population of employers” may have received notice that they were being assessed a failure to deposit penalty – even though the penalty doesn’t apply.
Here’s how that happened.
As part of the FFCR Act (Families First Coronavirus Response Act), businesses with fewer than 500 employees (including some self-employed persons) are entitled to refundable tax credits. The credits are intended to mitigate the costs of providing qualified sick leave wages and qualified family leave wages paid to employees when an employee cannot work during the COVID pandemic.
Additionally, under the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), employers also had an opportunity to claim the new employee retention credit (ERC). The ERC provides a refundable credit to employers, no matter the size of the business, for keeping employees on the payroll. The amount of the credit is 50% of qualifying wages paid up to $10,000 per employee for all quarters.
In both cases, a business that’s entitled to receive the credit could reduce their required deposits of payroll taxes by the amount of the credit. That credit is reported (and reconciled) on Form 941 – the same form that businesses use to report and remit payroll taxes.
In May of 2020, the IRS released Notice 2020-22 (downloads as a PDF) to confirm that employers claiming the new tax credits may reduce their deposits throughout the tax period up to the amount of the credit. Specifically, Section 3 of the Notice provided relief from the failure to deposit penalty imposed by section 6656 of the Internal Revenue Code (Code) for an employer’s failure to timely deposit payroll taxes “to the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.” The Notice applied to qualified sick leave wages and qualified family leave wages paid during the period beginning April 1, 2020, and ending December 31, 2020, and employee retention wages paid during the period beginning on March 13, 2020, and ending December 31, 2020.
Sounds great, right? But since the schedules of liabilities on Form 941 didn’t always match the reduction in deposits for every pay date, the IRS processes flagged some returns. The IRS issued a failure to deposit penalty on the difference in the reported liabilities and the reduced deposits even though those reductions were appropriate. The IRS notified the affected businesses by sending a CP161 notice.
The result? Panicked business owners and taxpayers. And you know why: payroll taxes are serious stuff. Failure to remit them can, in some instances, result not only in penalties but personal liability for business owners (and in extreme cases, criminal penalty). You don’t want to be on the receiving end of these notices.
If you’re one of the affected businesses, the IRS advises that you don’t have to do anything, stating, “The IRS is taking actions to identify these employer accounts and correct them as soon as possible. Employers that have recently received these notices do not need to take additional actions at this time.”
Payroll companies, like Paychex, in receipt of the notices are advising their customers the same way.
In the meantime, the IRS says that it’s taking steps to stop this from happening in the future. For more information on the credits, you can check out the IRS FAQs here.
And if you’re thinking you’ve read this story before, it’s but not the same… Yes, I did just post on notices that were sent out when tax might not be due. This story isn’t about those notices – that’s a different mistake. And yes, it’s shaping up to be a long tax year.