President Trump signed the Families First Coronavirus Response Act (“FFCRA” or “the Act”) into law on March 18. The Act requires employers with fewer than 500 employees to provide their employees with paid sick leave and expanded Family and Medical Leave Act rights, subject to exceptions for certain healthcare providers, emergency responders, and businesses with fewer than 50 employees if compliance would jeopardize the business as a going concern. Free testing for COVID-19 is also mandated. Based on news releases issued in the past week, the mandated leave provisions and related tax credits both become effective Wednesday, April 1.
What we tax advisers are focusing on are the two refundable payroll tax credits designed to help these businesses offset the costs associated with mandated paid leave. A news release jointly issued on March 20 by the IRS and the U.S. Departments of Treasury and Labor (IR-2020-57) states that eligible employers may retain both the employer’s and employee’s share of FICA/Social Security (6.2% of wages on each side or 12.4%), plus their employees’ federal income tax withholdings. And that apparently includes the FICA and federal income tax withholdings of all their employees – not just those on qualified leave. The credits are designed to “immediately and fully” reimburse qualifying businesses for the cost of providing coronavirus-related leave to their affected employees.
Eligible employers can claim both credits in an amount equal to 100% of the sick/family leave wages paid pursuant to the FFCRA, subject to certain limitations discussed below. If there are not sufficient payroll taxes to cover the cost of qualified sick and family leave payments, employers may file a request for an accelerated refund from the IRS.
According to the news release, the IRS expects to process those claims “in two weeks or less.” More detailed guidance is promised (thankfully).
Similar credits are available to self-employed individuals (independent contractors and presumably partners in small and mid-size professional services firms) who must take qualified sick leave. Those credits can be claimed on the person’s individual income tax return and on their quarterly estimated tax returns as well.
Paid Sick Leave Tax Credit
Eligible employers now required to offer paid sick leave to an employee who is unable to work because of COVID-19 issues may receive a refundable sick leave tax credit equal to 100% of the amount of wages paid (plus “qualified health plan expenses” relating to that employee’s wages). The amount of the credit is limited, however, to $200 per day if the employee is unable to work or telework because they are caring for a minor child whose school or childcare facility is closed, or taking care of an individual subject to a government quarantine or isolation order, or has a substantially similar condition as specified by HHS. But the credit is increased to the lesser of the employee’s regular rate of pay or $511 per day if the employee is on leave because he or she:
- Is subject to a federal, state or local quarantine or isolation order related to COVID-19; or
- Has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19; or
- Is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
As an overall limitation, the tax credit is limited to 10 days (or 80 hours) of wages paid per employee per quarter, or up to $5,110 per employee per quarter.
Paid Family Leave or “Child Care Leave” Tax Credit
Eligible employers may also claim a separate refundable family leave tax credit for wages paid to an employee (and costs to maintain their health insurance coverage) who is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to COVID-19. The family leave tax credit, referred to in the IRS news release as the “child care leave credit,” is limited to two-thirds of the employee’s regular rate of pay, up to $200 per day, and $10,000 in the aggregate for all calendar quarters. Up to 10 weeks of qualifying leave can be counted toward the family leave/child care leave tax credit.
The joint news release is generally favorable to eligible employers and fills in some gaps left from the hastily enacted FFRCA. Two examples are offered that make it all sound simple. The first example confirms that creditable payroll taxes are not limited to directly affected employees of the employer but those taxes withheld from “all its employees” wages. Thus, if an eligible employer paid $5,000 in “sick leave” and is otherwise required to deposit $8,000 in payroll taxes for all employees, it’s entitled to retain $5,000 and deposit only the $3,000 balance on its next regular deposit date. The second example affirms that if the eligible employer paid $10,000 in qualified sick leave and was otherwise required to deposit $8,000 in payroll taxes, then it can retain the entire $8,000 and “file a request for an accelerated credit [cash] for the remaining $2,000.”
An eligible employer isn’t required to claim these credits. But if it does, it’s required to include the amount of the credits in its gross income for federal income tax purposes. Additionally, any wages taken into account in determining the sick leave or family leave/child care leave credits allowed under the FFCRA will reduce the I.R.C. § 45S “paid family and medical leave credit” that would otherwise be available to the employer. These credits are a relative drop in the bucket compared to the array of potential tax benefits in the proposed CARES Act, which was signed into law last week.
The original article, "What Birmingham Businesses Should Know About the Families First Coronavirus Response Act Tax Credits," first appeared in the Birmingham Business Journal on March 31, 2020.