This Is How the FFCRA Paid Leave Tax Credits Work

March 28, 2020Alerts

The obligation to provide paid sick leave and paid family leave under the Families First Coronavirus Response Act (FFCRA) commences on April 1, 2020 — 14 days after the March 18 enactment. The choice of April 1 nullified the advice of nearly every lawyer in the country that the effective date should be April 2, perhaps a cruel April Fool’s Day joke by the Department of Labor (DOL).

The obligation under the FFCRA to provide paid leave benefits applies to all private employers and nonprofit organizations with fewer than 500 employees and most governmental employers of any size. The application of the FFCRA is mind-numbingly complex because, among other things, unpaid leave also may be available under the Family and Medical Leave Act (FMLA), and there are different caps on benefit payments depending upon the type of leave utilized and different eligibility requirements. For a taste of the complexity, see the United States Department of Labor’s FFCRA poster, which must be posted and distributed to all employees by April 1. An employer may satisfy this requirement by emailing or direct mailing the poster to all employees or posting this notice on an employee information internal or external website.

Once an employer gets through this thicket and provides paid leave to an employee, an employer can recoup the cost of the paid leave from the U.S. Department of the Treasury (Treasury), albeit subject to certain daily and aggregate caps. Most importantly, the tax credits are refundable, i.e. if an employer paid more in benefits than the employer owes in payroll taxes, Uncle Sam will cut a check to the employer for the overage.

Source of Tax Credit

In the usual course of business, when an employer pays its employees, it is required to withhold from the employees' paychecks federal income taxes and the employees' share of Social Security and Medicare taxes. An employer then is required to deposit these federal taxes, along with the employer’s share of Social Security and Medicare taxes, with the Internal Revenue Service (IRS) and file quarterly payroll tax returns (Form 941 series).

Under the FFCRA, employers who pay qualifying sick or child care leave now will be able to retain a portion of the payroll taxes equal to the amount of qualifying sick and child care leave that the employer paid, rather than deposit those taxes to the IRS.

The payroll taxes that are available for retention include 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. (Note, however, that the CARES Act suspended the requirement to submit the employer share.)

Examples

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required to deposit the remaining $3,000 with the IRS on the employer’s next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated payment for the remaining $2,000. The IRS says it expects to process these requests in two weeks or less.

The Treasury Department, IRS, and DOL are playing nice with each other and will be updating this limited guidance. Check for developments here.  Where a refund is owed, the IRS promises to issue an “expedited advance” by the submission of a “streamlined” (less than 10 pages?) claim form. As of March 28, the actual filing process and refund mechanism have not yet been established. 

Save Those Receipts

This tax credit is administered by the IRS so some lucky employers will be subject to an IRS audit. DOL advises that an employer should retain appropriate documentation, including any needed substantiation to support the credit. For example, if an employee takes expanded family and medical leave to care for his or her child whose school or place of care is closed, or a child care provider is unavailable, due to COVID-19, it is advisable that an employer require its employees to provide documentation in support of the leave to the extent permitted under the certification rules for conventional FMLA leave requests. For example, this could include a notice that has been posted on a government, school or day care website, or published in a newspaper, or an email from an employee or official of the school, place of care or child care provider. 

All existing certification requirements under the FMLA remain in effect if an employee is taking leave for one of the existing qualifying reasons under the FMLA. For example, if an employee is taking leave beyond the two weeks of emergency paid sick leave because of a medical condition related to COVID-19 that rises to the level of a serious health condition, an employee must continue to provide medical certifications under the FMLA if required by an employer.

Tax Credit for Health Insurance Coverage

Employers also are entitled to an additional tax credit based on the costs to maintain health insurance coverage for an employee during the FFCRA-covered leave period. How this will be calculated is currently a mystery.

Limited Small Business Exemption

Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed or child care is unavailable, in cases where the viability of the business is threatened. The method to obtain this exemption has not yet been announced and the exemption is limited to paid child care leave. DOL claims that the exemption will be available “on the basis of simple and clear criteria” in circumstances involving jeopardy to the viability of an employer's business as a going concern. DOL will issue guidance and rule-making to articulate this standard. Right now, this also remains a mystery.

Relief for Gig Workers and Self-Employed Individuals

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on an individual’s income tax return and will reduce estimated tax payments.

Non-Enforcement Period

DOL has announced that it will observe a non-enforcement period until April 17, 2020 so long as an employer attempts in good faith to comply with the FFCRA, pays benefits owed and promises to comply going forward.

if you have questions about the FFCRA's Paid Leave Tax Credits, or other Labor & Employment issues related to the COVID-10 outbreak, contact Steven Ludwig or another member of the firm's Labor & Employment Practice.