On March 18, 2020, the Families First Coronavirus Response Act (FFCRA) was signed into law requiring employers with fewer than 500 employees to make payments for COVID-19 related FMLA leave and paid sick leave required by the act. To lessen this financial burden to employers, the act provides for refundable tax credits to offset payroll taxes. The FFCRA tax credits will be provided for eligible wages paid from April 2, 2020 to December 31, 2020.
Emergency FMLA expansion tax credit
For the Family and Medical Leave Act (FMLA) portion of the FFCRA, employers are eligible for a payroll tax credit that equals 100% of the qualified family leave wages required to be paid by the employer under the Act. Credits are calculated per individual and are capped at $200/day for up to 10 weeks, with a maximum of $10,000 per employee. If an employee is taking FMLA leave to take care of a child, an employer may only claim credits representing 2/3 of the employee’s regular pay.
Paid sick leave tax credit
For the paid sick leave portion of the FFCRA, employers are eligible for a payroll tax credit that equals 100% of the qualified sick leave wages required to be paid by the employer under the Act. Credits are calculated per individual and have two different caps based on the reason for the paid sick leave:
- If the employee is quarantined, self-quarantined or has COVID-19, credits are capped at $511/day for up to 10 days per calendar quarter.
- If the employee is taking leave for any other purpose under the act, credits are capped at $200/day for up to 10 days per calendar quarter.
The credit can be further increased by certain qualified health plan expenses of the employer that are allocable to qualified sick leave wages for which the credit is allowed.
Generally, the tax credits will be applied quarterly as a dollar-for-dollar reduction of the employer portion of payroll taxes imposed by Secs. 3111(a). Any credits in excess of an employer’s payroll tax liability will be refunded to the employer.
Eligible self-employed individuals may receive a refundable credit against income tax for qualified sick leave or FMLA leave amounts. An eligible self-employed individual is an individual who regularly carries on any trade or business and would be entitled to receive paid sick leave or FMLA leave under the act if the individual were an employee.
Large employers (employers with 500 or more employees) that are ineligible for the FFCRA payroll tax credits may have another option in 2020 for paid family and medical leave. The Sec. 45S credit created by the Tax Cuts and Jobs Act isn’t limited by employer size. However, it’s not as generous and has different rules.
Sec. 45S provides a tax credit to employers that provide paid family and medical leave that’s equal to a percentage of wages paid to “qualifying employees.” There is a $75,000 compensation limit for qualifying employees. For employers to use the Sec. 45S credit, they must have a written policy in place for paid family and medical leave.
Frequently asked questions
Q: Is the credit for the “employer-side” payroll taxes or the “employee-side” payroll credit?
A: Certain employer-side payroll taxes only.
Q: May large employers (500+ employees) voluntarily comply with the FFCRA to claim tax credits?
A: No. It does not appear the IRS will allow tax credits to large employers. IRS news release 2020-57 states: “small and midsize employers can begin taking advantage of two new refundable payroll tax credits.” This seems to imply that the IRS is not allowing these tax credits to large employers.
Q: If an employer pays an employee on FMLA leave for child care purposes at 100% of their normal wages instead of the 2/3 required by the act, may they claim tax credits for the full 100% paid?
A: No. It does not appear the act will allow this. The FFCRA states that only payments that are “required to be paid” by reason of the act are eligible to receive credits. If only 2/3 of compensation is required to be paid by the act, then only 2/3 of compensation will be eligible for tax credits.
Q: May an employer claim both FFCRA tax credits and Sec. 45S tax credits?
A: No. The IRS will not allow double-dipping. An employer may not claim both FFCRA tax credits and Sec. 45S tax credits for the same wages.
Q: How will these credits work?
A: Generally, the credits will work as they usually do. The employer will withhold and remit payroll taxes as normal and claim the credit on their annual return. However, if it is necessary, an eligible employer may retain a portion of the payroll taxes instead of remitting them to make payments under the act. The IRS will also advance credits to employers to cover payments under the act. More information on which employers are eligible for retaining payroll taxes and requesting advanced credits is expected from the IRS this week.
This information does not constitute tax or legal advice. For information and guidance on how this tax alert may affect your tax situation, please reach out to your personal tax professional.