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Employer Tax Implications of the Families First Coronavirus Response Act - March 24, 2020

On March 20, 2020, the IRS made an announcement (2020-57) providing some guidance on the implementation of the Paid Sick Leave Credit and Child Care Leave Credit included in the Families First Coronavirus Response Act. It also clarified some questions on the credits.


If there is one positive thing that COVID-19 has done, it has urged Congress to work together and fast to pass some legislation. The Families First Coronavirus Response Act just introduced into the house on March 11 has now been approved by both the House and Senate and was signed by the President on March 18, 2020.


One of the biggest pieces of the FFCRA is a new law that provides paid sick leave and free coronavirus testing, expands food assistance and unemployment benefits, and requires employers to provide additional protections for health care workers. In addition to requiring additional paid sick and family medical leave, the new law provides for tax credits to employers that begin March 20, 2020 and continue through December 31, 2020.


Implementation of the Credits

When employers pay their employees, they are required to withhold federal income taxes and the employee’s share of social security (6.2%) and Medicare (1.45%) taxes from their employees’ paychecks. Employers are then required to deposit these taxes, along with the employer’s portion of social security (6.2%) and Medicare (1.45%) taxes with the IRS either on a monthly or semi-weekly basis depending on the size of the business. Collectively, these employer and employee taxes are called payroll taxes. Employers file Form 941 on a quarterly basis to reconcile these deposits with the total amount of payroll taxes due for that quarter.


In order to expedite relief, the IRS announced that employers may retain an amount of payroll taxes equal to the amount of qualifying sick and family leave payments the employer paid, rather than depositing them with the IRS. The payroll taxes eligible for retention include withheld federal income taxes, and both the employee and employer share of social security and Medicare taxes. This means that employers will be immediately reimbursed for these qualifying sick and family leave payments, instead of needing to wait until they file their quarterly Form 941.


If the total amount of payroll taxes collected for a given deposit period is insufficient to fully reimburse the employer for the total amount of qualifying sick and family leave payments made during that period, the employer can request an accelerated payment from the IRS to cover the difference. The IRS expects to process these requests within two weeks or less. The IRS has stated that additional details on this requested procedure will be announced the week of March 23, 2020.


Example 1

If an eligible employer paid $5,000 in qualifying sick and family leave payments and is otherwise required to deposit $8,000 in payroll taxes for a given deposit period, that employer could use up to $5,000 of the $8,000 in payroll taxes it was otherwise required to deposit for making qualifying sick and family leave payments. In this case, the employer would only be required to deposit the remaining $3,000 on its next deposit date.


Example 2

If an eligible employer paid $10,000 in qualifying sick and family leave payments and is otherwise required to deposit $8,000 in payroll taxes for a given deposit period, that employer could use the entire $8,000 in payroll taxes it was otherwise required to deposit for making qualifying sick and family leave payments. In this case, the employer would file a request for an accelerated credit for the remaining $2,000.


As these examples illustrate, all payroll taxes for a given deposit period may be used to offset the qualifying sick and family leave payments made during that period. As discussed below, the credits will ultimately only reduce the employer portion of Social Security taxes paid with respect to all employees, with any excess credits being fully refundable. Presumably this will be reconciled on the employer’s 941 return on a quarterly basis but additional IRS guidance is expected to clarify.

 

Required Paid Sick Leave Credit

  1. The credit to an employer is equal to 100% of Qualified Sick Leave wages paid plus the employer portion of Medicare taxes (currently 1.45%) paid with respect to those wages. The credit is limited to $511 per individual per day of leave due to COVID-19-related quarantine or personal illness related to COVID-19. The credit is limited to $200 per individual per day for leave to care of another person or school/daycare closure related to COVID-19.
  2. The credit can only be taken on each employee for up to 10 days of Qualified Sick Leave.
  3. The credit applies to reduce the employer’s portion of social security tax (currently 6.2%) due for a given quarter for all its employees on all wage payments (not just Qualified Sick Leave wage payments). The credit is refundable to the extent it exceeds the amount due on the employer’s portion of social security tax due for a given quarter for all its employees.
  4. The credit can be increased to account for “qualified health plan expenses” paid and allocable to the qualified sick leave wages to the extent those amounts are excluded from the gross income of employees. Qualified health plan expenses are those amounts paid by the employer to provide a group health plan.
  5. For self-employed individuals, a similar type of credit is available against income tax (including self-employment tax). The amount of the credit is equal to the number of days during the tax year that the individual is unable to perform services under the new law multiplied by the lesser of (i) $200 per day for leave due to care of another person or school/daycare closure or $511 per day for leave due to quarantine or personal illness; or (ii) 67% of the average daily self-employment income of the individual for leave due to care of another person or school/daycare closure or 100% of the average daily self-employment income of the individual for leave due to quarantine or personal illness. The average daily self-employment income is determined by taking the net earnings from self-employment income for the year divided by 260. This credit also is limited for up to 10 days of the qualified sick leave.

Required Paid Family Leave Credit

  1. The credit to an employer is equal to 100% of Qualified Family Leave wages paid plus the employer portion of Medicare taxes (currently 1.45%) paid with respect to those wages. The credit is limited to $200 per day per individual, not to exceed $10,000 per individual in the aggregate for all calendar quarters.
  2. The credit applies to reduce the employer’s portion of social security tax (currently 6.2%) due for a given quarter for all its employees on all wage payments (not just Qualified Family Leave wage payments). The credit is refundable to the extent it exceeds the amount due on the employer’s portion of Social Security tax due for a given quarter for all its employees.
  3. The credit can be increased to account for “qualified health plan expenses” paid and allocable to the qualified family leave wages to the extent those amounts are excluded from the gross income of employees. Qualified Health Plan Expenses are those amounts paid by the employer to provide a group health plan.
  4. For self-employed individuals, a similar type of credit is available against self-employment tax. The amount of the credit is equal to 100% of the qualified family leave equivalent amount with respect to the individual which is determined by multiplying the number of days (not to exceed 50) during the tax year that the individual is unable to perform services, by the lesser of (i) 67% of the average daily self-employment income of the individual; or (ii) $200. The average daily self-employment income is determined by taking the net earnings from self-employment income for the year divided by 260.

Exemption from Employer Portion of Social Security Tax

To further assist employers, wages paid as Qualified Sick Leave payments or Qualified Family Leave payments under this new act do not qualify as wages for purposes of the 6.2% employer portion of the employment taxes.




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