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IRS Issues Guidance on Tax Credits for Required Paid Leave Under FFCRA

April 6, 2020Alerts

The IRS has posted 66 detailed FAQs regarding the COVID-19-related tax credits for small and midsize businesses under the Families First Coronavirus Response Act (FFCRA). The FFCRA provides new employee leave benefits, including paid sick leave options for employees who work for certain public employers and private employers with fewer than 500 employees, referred to here as “eligible employers.” Businesses will be able to take advantage of new tax credits to offset costs associated with paid emergency leave and sick leave benefits implemented under FFCRA. Applicable tax credits also extend to amounts paid or incurred to maintain health insurance coverage.

The FFCRA requires employers to provide paid leave through two separate provisions:

  • The Emergency Paid Sick Leave Act (EPSLA), which entitles workers to up to 80 hours of paid sick time when they are unable to work for certain reasons related to COVID-19.

    AND
     
  • The Emergency Family and Medical Leave Expansion Act (Expanded FMLA), which entitles workers to certain paid family and medical leave.

Businesses with fewer than 50 employees may be able to apply for an exemption from the Secretary of Labor if providing either of the types of paid leave could “jeopardize the viability” of the business. The Department of Labor (DOL) is expected to issue regulations on this topic later this month.

Self-employed individuals who regularly carry on any trade or business, and would be entitled to receive comparable qualified sick leave wages or qualified family leave wages under the FFCRA if the individual were an employee of an eligible employer (other than himself or herself), are eligible for the credits. Such eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax, as further described below.

Emergency Paid Sick Leave Act

The EPSLA requires eligible employers to provide to all employees:

  • Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate up to a maximum of $511 per day and $5,110 in the aggregate (over a two-week period) if the employee is unable to work (or telework) because the employee is quarantined (pursuant to federal, state or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis.
    OR
  • Two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s regular rate of pay up to a maximum of $200 per day and $2,000 in the aggregate (over a two-week period) in instances where the employee is unable to work (or telework) because of a bona fide need to care for an individual subject, to quarantine (pursuant to federal, state or local government order or advice of a health care provider) or care for a son or daughter of such employee (under 18 years of age) whose school or child care provider is closed or unavailable for reasons related to COVID-19.

The total required sick leave period is two weeks at the rate specified under the applicable provision above.

Family Paid Leave Refundable Credit

In addition to the paid sick leave credit, the Expanded FMLA requires an eligible employer to provide to employees that is has employed for at least 30 days:

  • Up to an additional 10 weeks of expanded paid family and medical leave at two-thirds of the employee’s regular pay if the employee is unable to work (including telework) due to a need to care for a child whose school is closed or whose child care provider is unavailable for reasons related to COVID-19. 

In addition to the sick leave credit, eligible employers are entitled to a refundable child care tax credit for the payment of expanded paid family and medical leave equal to two-thirds of the employee’s regular pay, up to a maximum amount of $200 per day or $10,000 in the aggregate (paid over a ten-week period).

Overview of Credits

Eligible employers are entitled to receive a credit in the full amount of the qualified sick leave wages and qualified family leave wages, plus allocable qualified health plan expenses and the employer’s share of Medicare tax (the eligible employer is not subject to the employer portion of Social Security tax imposed on those wages), paid for leave during the period beginning April 1, 2020, and ending Dec. 31, 2020. The credit is allowed against the employer portion of Social Security taxes on all wages and compensation paid to all employees. If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment and refunded to the employer.

Eligible employers that pay qualified leave wages are able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, rather than depositing them with the IRS. The federal employment taxes that are available for retention by eligible employers include federal income taxes withheld from employees, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes with respect to all employees.

Key Points of the FAQs

The FAQs address 66 points relating to, among other things:

  1. Determining the amount of the tax credit for qualified sick leave wages
  2. Determining the amount of the tax credit for qualified family leave wages
  3. Determining the amount of allocable qualified health plan expenses
  4. How to claim the credits
  5. How should an employer substantiate eligibility for tax credits for qualified leave wages
  6. Periods of time for which credits are available
  7. Various special issues for employers
  8. Specific issues related to self-employed individuals

For the full text of the FAQs, see COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs. The following summarizes key points from the FAQs.

Eligible Employers

The paid sick leave and expanded family and medical leave provisions of the FFCRA apply to certain public employers, and private employers with fewer than 500 employees. A business is considered to have fewer than 500 employees if, at the time an employee’s leave is to be taken, the business employs fewer than 500 full-time and part-time employees within the United States. The DOL guidance provides a more detailed summary of which workers must be taken into account for purposes of the fewer than 500 employee threshold. DOL guidance also explains when business entities should be treated as separate employers and when they should be aggregated as a single employer for purposes of determining the total number of employees. 

Example: If two entities are found to be joint employers under the Fair Labor Standards Act, all of their common employees must be counted in determining whether paid sick leave must be provided under the EPSLA and expanded family and medical leave must be provided under the Expanded FMLA. 

For further information, see the DOL’s Families First Coronavirus Response Act: Questions and Answers.

Amount of Refundable Tax Credits to Eligible Employers

The credits cover 100% of up to ten days of qualified sick leave wages and up to ten weeks of qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an eligible employer paid during a calendar quarter, plus the amount of the eligible employer’s share of Medicare taxes imposed on those wages. Qualified sick leave and qualified family leave under the FFCRA are in addition to an employee’s preexisting leave entitlements.

Example: An eligible employer pays $10,000 in qualified sick leave wages and qualified family leave wages in the second quarter of 2020. It does not owe the employer’s share of Social Security tax on the $10,000, but it will owe $145 for the employer’s share of Medicare tax. Its credits equal $10,145, which include the $10,000 in qualified leave wages plus $145 for the eligible employer’s share of Medicare tax (this example does not include any qualified health plan expenses allocable to the qualified leave wages). This amount may be applied against any federal employment taxes that the eligible employer is liable for on any wages paid in the second quarter of 2020. Any excess over the federal employment tax liabilities is refunded in accordance with normal procedures.  Eligible employers must still withhold the employee’s share of Social Security and Medicare taxes on the qualified leave wages paid.

Claiming the Credit

Eligible employers will claim the credits on their federal employment tax returns (e.g., Form 941, Employer's Quarterly Federal Tax Return), but they can benefit more quickly from the credits by reducing their federal employment tax deposits.

Requirements for Waiver of Penalty for Reduced Employment Tax Deposits

An eligible employer will not be subject to a penalty under section 6656 of the Internal Revenue Code for failing to deposit federal employment taxes relating to qualified leave wages in a calendar quarter if:

  • The eligible employer paid qualified leave wages to its employees in the calendar quarter before the required deposit.
  • The amount of federal employment taxes that the eligible employer does not timely deposit is less than or equal to the amount of the Eligible Employer’s anticipated tax credits for these qualified leave wages for the calendar quarter as of the time of the required deposit.
    AND
    The eligible employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits (see below).

Requesting an Advance of the Credits

If the federal employment taxes that would otherwise be deposited by an eligible employer are less than the available tax credits for qualified sick and qualified family leave, an eligible employer may request an advance payment of the excess credits from the IRS by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19. The IRS expects to begin processing these requests during April 2020.

ExampleAn eligible employer paid $10,000 in qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages) and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same quarter. The eligible employer can keep the entire $8,000 of taxes that the eligible employer was otherwise required to deposit, without penalties, as a portion of the credits it is otherwise entitled to claim on the Form 941. The eligible employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.

Documentation to Substantiate Eligibility for Credits

An eligible employer must substantiate eligibility for the sick leave or family leave credits by receiving a written request for such leave from the employee in which the employee provides:

  • The employee’s name;
  • The date or dates for which leave is requested;
  • A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason;
    AND
    A statement that the employee is unable to work, including by means of telework, for such reason. (Emphasis added.)

In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.

Qualified Health Plan Expenses

"Qualified health plan expenses” are amounts paid or incurred by the eligible employer to provide and maintain a group health plan (as defined in section 5000(b)(1) of the Internal Revenue Code), but only to the extent that those amounts are excluded from the gross income of employees.

Determining Amount of Allocable Qualified Health Plan Expenses

Generally, the tax credits for qualified sick leave wages and qualified family leave wages are increased by the qualified health plan expenses allocable to each type of qualified leave wages. Qualified health plan expenses are properly allocated to the qualified sick or family leave wages if the allocation is made on a pro rata basis among covered employees (for example, the average premium for all employees covered by a policy) and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate).

Example: An eligible employer sponsors an insured group health plan that covers 400 employees, some with self-only coverage and some with family coverage. Each employee is expected to work 260 days a year. (Five days a week for 52 weeks.) The employees contribute a portion of their premium by pretax salary reduction, with different amounts for self-only and family. The total annual premium for the 400 employees is $5.2 million. (This includes both the amount paid by the eligible employer and the amounts paid by employees through salary reduction.)

For an eligible employer using one average premium rate for all employees, the average annual premium rate is $5.2 million divided by 400, or $13,000. For each employee expected to have 260 work days a year, this results in a daily average premium rate equal to $13,000 divided by 260, or $50. That $50 is the amount of qualified health expenses allocated to each day of paid sick or family leave per employee.

Credits for Self-Employed Individuals

The FFCRA provides a refundable payroll tax credit, allowed against regular income taxes, for eligible self-employed individuals, for up to ten days of sick leave. The credit covers 100% of a self-employed individual’s wages for sick leave (individuals who are under self-quarantine or getting tested for COVID-19), up to $511 per day. In order to determine the limit on the credit for sick leave wages, the number of days the self-employed individual is unable to work must be multiplied by the lesser of (1) 100% of the taxpayer’s daily self-employment income or (2) $511.

The FFCRA also provides a refundable payroll tax credit, allowed against regular income taxes, for self-employed persons, for up to 50 days of family leave. This credit covers 67% of the self-employed individual’s wages for family leave (caring for a family member affected by the coronavirus or a child following the child’s school closing), up to $200 per day. The limit on the credit for family leave wages is determined by multiplying the number of days the self-employed individual is unable to work by the lesser of (1) 67% of the taxpayer’s daily self-employment income or (2) $200.

For further guidance on specific provisions related to self-employed individuals, see questions 60 through 66 of the FAQs.

Interaction of FFCRA Tax Credits With Other Tax Credits

Any qualified leave wages taken into account for the tax credits may not be taken into account for the purpose of determining a credit under section 45S, Employer Credit for Paid Family and Medical Leave, of the Internal Revenue Code. An eligible employer may not claim a credit under section 45S with respect to the qualified sick leave wages or qualified family leave wages for which it receives a tax credit under FFCRA, but may be able to take a credit under section 45S with respect to any additional wages paid, provided the requirements of section 45S are met with respect to the additional wages.

Additional Information