COVID-19 RELIEF: Employment Tax Credit is Now Available for Businesses Subject to Mandated Paid Leave Under the Family First CoronaVirus Response Act
On March 20, 2020 the Internal Revenue Service (“IRS”) issued guidance (IR-2020-57) as to how small and midsized employers can take advantage of the payroll tax credits provided for under the Families First Coronavirus Response Act (the “Act”) to obtain reimbursement for the employers’ costs incurred in providing emergency sick and/or Family Medical Leave Act (“FMLA”) leave as mandated under the Act.
As was discussed in our previous alert, HR 6201: What Employers Need to Know About the Federal Families First Coronavirus Response Act, the Act requires that employers with under 500 employees provide sick leave and paid family leave for certain eligible employees who have been affected by COVID-19. While the mandated leave provides some relief to employees who otherwise may be without any income during this time, it can put a significant strain on businesses already in a financially precarious position due to COVID-19.
In order to provide relief for businesses subject to the paid leave mandate, the Act provides employers with an immediate payroll tax credit intended to fully fund the required paid emergency sick/FMLA leave.
Is My Business Eligible for the Tax Credit?
To qualify for the relief, an employer must be a business or tax-exempt organization with fewer than 500 employees and be required under the Act to provide emergency paid sick and/or FMLA leave to eligible employees between the effective date of April 1, 2020 and December 31, 2020. Similar tax credits are available for self-employed individuals. As of now, there is no indication that any relief in the form of tax credits will be provided to large employers with 500 or more employees which voluntarily provide the leave mandated for small to midsized employers under the Act.
Amount of Available Tax Credit
The amount of the tax credit available to an employer depends on the circumstances under which the paid leave is provided under the Act. The limits are as follows:
- With respect to employees paid sick leave as a result of (i) being subject to a federal, state, or local quarantine or isolation order related to COVID-19, (ii) being advised by a health care provider to self-quarantine due to concerns related to COVID-19, or (iii) experiencing symptoms of COVID-19 and seeking a medical diagnosis, the maximum tax credit is 100 percent of the qualified sick leave wages paid by the employer, up to $511 per day per employee, with a limit of $5,110 per employee (10 days).
- With respect to paid sick leave as a result of an employee (i) caring for an individual who either has been identified as being subject to a quarantine or isolation order related to COVID-19 or who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19, (ii) caring for the employee’s son or daughter based on a school or place of care closure, or if the child’s care provider is unavailable due to COVID-19 precautions, or (iii) experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, the maximum tax credit is two thirds of the employee’s regular rate of pay, up to $200 per day per employee and $2,000 in the aggregate (up to 10 days).
- For emergency FMLA leave provided for under the Act, the maximum tax credit is equal to two-thirds of the employee’s regular pay, up to $200 per day or $10,000 in the aggregate.
The allowable tax credit may be increased by the employer’s qualified health plan expenses attributable to the leave wages. Qualified health plan expenses are generally the amounts paid by an employer to provide a group health plan, to the extent the amounts are excluded from the employees’ income as coverage under a health plan. Guidance is expected to be forthcoming on the proper allocation of health plan expenses. However, an allocation will be considered proper if it is made on the basis of being pro rata both among covered employees and on the basis of periods of coverage, i.e., the leave period to which the wages relate.
How Do I Claim the Tax Credit?
The tax credit is taken by withholding the amount of the eligible credit from the employer’s payroll tax deposits. Employers can offset the amount of their eligible tax credit against the amount the employer is required to deposit for the employer and employee’s share of Social Security and Medicare taxes.
Notably, IRS Notice IR-2020-57 provides broader language, stating that the tax credits can be taken against “withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.” This language appears to be contradictory to the express language in the Act, which specifically references that the credit can be applied against Social Security and Medicare taxes. Unless and until additional guidance is provided to the contrary, we would caution employers against using federal income tax withholdings as a method of taking the tax credit.
If the Social Security and Medicare taxes are not sufficient to cover the cost of the entire tax credit which an employer is entitled to receive, the employer may file a request with the IRS for an accelerated payment of the remaining tax credit. The IRS had indicated that reimbursements will be processed quickly – in no more than two weeks. The IRS will be issuing guidance this week which we expect to provide more details regarding steps to obtain accelerated payments of the tax credit.
For example, if an eligible employer pays $5,000 in sick leave and would generally be required to deposit $8,000 in Social Security and Medicare payroll taxes, the employer could use up to $5,000 of the $8,000 payroll taxes to make qualified leave payments. The employer would be required to deposit the remaining $3,000 on its next regular deposit date. Alternatively, if the employer paid $10,000 in sick leave, the employer could use the entire $8,000 of Social Security and Medicare payroll taxes in order to make qualifying leave payments and could file a request for an accelerated tax credit for the remaining $2,000.
We expect that additional regulations and guidance will be provided by the IRS in the near future. We will provide updates as that guidance is published. For the time being, employers can be assured that the employment tax credits will at least provide some financial assistance in funding the newly mandated emergency paid sick/FMLA leave as required by the Act.
 Significantly, the wages paid for leave mandated by the Act are not considered to be wages under the Federal Insurance Contributions Act (“FICA”), so FICA taxes need not be withheld from such leave payments.