The IRS issued guidance on the FFCRA Paid Leave Tax Credits under the Families First Coronavirus Response Act (“FFCRA”) on March 31, 2020. The FFCRA Paid Leave Tax Credits are fully refundable tax credits giving covered employers dollar-for-dollar reimbursements for the costs of providing covered employees paid leave under the FFCRA’s Emergency Paid Sick Leave Act (“EPLSA”) and the Emergency Family and Medical Leave Expansion Act (“Expanded FMLA”). The IRS’s FFCRA Paid Leave Tax Credits FAQs can be found here.
Below is a summary of the key information from those FAQs:
The FFCRA Paid Leave Tax Credit reimburses covered employers for wages paid for leave required under the EPLSA and Expanded FMLA (collectively, “qualified leave wages”). Covered employers are those with fewer than 500 employees, or self-employed individuals carrying on a trade or business within the meaning of Section 1402 of the Internal Revenue Code (“Code”). The 500-employee threshold accounts for full-time and part-time employees within any State in the U.S., the District of Columbia, or any Territory or possession of the U.S. The U.S. Department of Labor temporary FFCRA regulations provide that joint or integrated employers should apply the integrated-employer test to determine when they should be aggregated as a single employer for purposes of the total number of employees. A tax-exempt employer that pays qualified leave wages may claim the tax credits.
Entitlement to Credits and Amount
Once qualified leave wages have been paid under EPLSA or Expanded FMLA, the covered employer is entitled to the tax credit. No tax credits will be available to covered employers who pay amounts above the daily and aggregate caps to employees (which are outlined below), even via employer-provided sick leave. Employers who allow employees to make up the difference to receive their full pay for certain types of leave are not entitled to a credit for amounts paid above the qualified leave wages.
Specifically, EPLSA leave payments are capped at (1) $511 per day ($5,110 in the aggregate), paid at the employee’s regular rate of pay, for an employee (who cannot work or telework but whose employer is not closed) “experiencing symptoms of COVID-19 and seeking a medical diagnosis” or subject to a government quarantine or isolation order or a health care provider’s advice to self-quarantine the employee; and (2) $200 per day ($2,000 in the aggregate), paid at 2/3’s the employee’s regular rate of pay, if the employee is caring for his/her minor son or daughter whose school or place of care is closed (or whose child care provider is unavailable) due to COVID-19, is caring an individual subject to a government quarantine or isolation order or a health care provider’s advice to self-quarantine, or is experiencing any “substantially similar condition specified by the Secretary of Health and Human Services.”
Expanded FMLA leave payments, paid at 2/3’s the employee’s regular rate of pay, are capped at $200 per day ($10,000 in the aggregate), and are only provided if the employee is caring for his/her minor son or daughter whose school or place of care is closed (or whose child care provider is unavailable) due to COVID-19, the employee cannot work or telework, and the employer’s business is not closed. Thus, these would be the maximum amount of credits available per employee.
Calculation of Credits
The amount of the credit is the sum of three components. First, the amount of any required qualified leave wages paid, which excludes any supplemental payments made or permitted by the employer. Second, the allocable cost to maintain and provide a group health plan during the leave period (“qualified health plan expenses” discussed below). Third, the employer’s portion of the Medicare tax (currently 1.45% of wages) associated with the qualified leave wages. Note that Medicare tax does not apply to employers subject to the subject to the Railroad Retirement Tax Act, so accordingly this amount will be zero for such employers.
The amount of wages cannot be double counted for the calculation of other credits. Thus, amounts paid under FFCRA are not eligible for the tax credit under Section 45S of the Code or the employee retention credit under the CARES Act. Amounts paid in excess of the required amounts, however, may be eligible under those provisions.
Qualified Health Plan Expenses
For qualified health plan expenses, the credits include the amounts paid or incurred by the employer to provide and maintain a group health plan, as defined in Section 5000(b)(1) of the Code, and the amounts of the employee portion of the cost paid with pre-tax salary reduction contributions. After-tax employee contributions are not included. If a covered employer sponsors more than one plan, qualified health plan expenses are determined separately and allocated to the employees who participate in each plan; the amounts for employees who participated in more than one plan are aggregated. Employee contributions to an HSA or Archer MSA are not included, but employer contributions to an HRA or health FSA may be (although, not a QSEHRA).
Covered employers sponsoring a fully-insured or self-insured group health plan should use a “reasonable method” to determine and allocate qualified health plan expenses. This might be the applicable COBRA premium typically available from the insurer or administrator. The FAQs have other considerations and examples to reference for these type of nuanced issues.
Covered employers are allowed to apply the credit against any federal employment taxes due in connection with the payment of payroll. That is, the employer may retain the amount of the credit from federal taxes that would otherwise be due (as opposed to depositing them). The federal payroll taxes that the credit may be applied against include the employer’s portion of social security and Medicare taxes, the employee’s portion of any FICA and Medicare taxes withheld, and federal income tax withholding on wages paid to employees. In each case, such amounts include any payments to any employees. Employers will be required to report the total qualified leave wages and the related credits on their federal employment tax returns, usually Form 941 (Employer’s Quarterly Federal Tax Return). The Form 941 will provide additional instructions about how to reflect the reduced liabilities for the quarter related to the deposit schedule.
To the extent the amount of the credit exceeds the amount of federal employment related taxes due, the employer may carry forward the excess credit to future periods, or apply for an advance from the IRS by filing the newly created Form 7200 (Advance Payment of Employer Credits Due to COVID-19). The IRS has indicated such advances will be handled in a manner similar to filing so-called “quickie” refunds of net operating losses. Historically, the IRS processed such returns with minimal validation before sending refunds, and instead verified with after-the-fact audits. The IRS provided a relaxation of rules requiring ink signed originals of tax forms for this purpose, and permits (and recommends) the filing of Form 7200 via fax (855-248-0552) to ensure prompt processing.
The IRS provided this useful example: An Eligible Employer pays $10,000 in qualified sick leave wages and qualified family leave wages in Q2 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 Eligible Employer is liable for on any wages paid in Q2 2020. Any excess over the federal employment tax liabilities is refunded in accord with normal procedures. Eligible Employer must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid. (emphasis added).
Credits are allowed for qualified leave wages paid for periods of leave beginning on April 1, 2020, and ending on December 31, 2020, but may be claimed even if the payment is actually made after December 31, 2020.
The IRS states that employers will incur no penalty for an accurate reduction in the tax deposit in anticipation of the credit for qualified leave wages paid; employers should be aware of the possibility of underpayment of taxes in these circumstances. See Notice 2020-22 for additional details.
Documenting and Substantiating Credits
Employers should retain appropriate records to document the credits from a tax perspective (Forms 941 and 7200 or other applicable filings), as well as documentation for how the amount of the qualified leave wages and qualified health plan expenses were determined. These records should be maintained for at least 4 years after the later of the date when the taxes are due or paid.
Substantively, the employer should also obtain written requests for leave from employees, containing the employee’s name, the dates for which leave is requested, a statement of the reason the leave is needed, and a statement that the employee is unable to work or telework for that reason. For purposes of a need for leave based on a quarantine or isolation order, the written request should state the name of the government entity or health care provider issuing the order. If the need relates to a need to care for a child whose school is closed or child care provider is unavailable, the written request should state the name and age of the child/ren, the name of the school, and a representation that no other person will be providing care. If the child is over fourteen, the request should also contain a statement that special circumstances exist requiring the employee to provide care.
Third Party Payors
To the extent a third party payor is used to report and pay federal employment taxes, the third party is generally not entitled to the credit. Instead the common law employer is entitled to the credit even if the third party is technically considered the “employer” for other purposes under the Code. Various claiming/reporting procedures apply based on the arrangement with the third party.
Multiple Avenues to Claim Credits and Government Assistance
Employers may receive both the FFCRA Paid Leave Tax Credit and the CARES Act Employee Retention Credit but, may not receive a credit under both provisions with respect to the same payments. A summary of the IRS’s CARES Act Employee Retention Credits can be found on Foley’s CARES Act – Summary of Tax Provisions (see Section 2301 of the CARES Act). Employers can also receive the FFCRA Paid Leave Tax Credit and the Small Business Interruption Loan under the CARES Act. Note though, that covered employers cannot claim a double benefit under the FFCRA, the employee retention credit and Section 45S of the Code.
Employer Taxation of Credits and Qualified Wage Payments
The employer reports as gross income the amount of the credits received. Generally, amounts paid to the employees (or to provide for qualified health plan expenses) will be deductible if such amounts were generally deductible absent the payment of the credits.
The qualified wage payments are not subject to the employer portion of social security (6.2%) but are subject to the Medicare tax (1.45%), if otherwise applicable. Note the amount of the credit includes the Medicare tax, so from a practical perspective, the employer does not incur any net social security or Medicare taxes on the payments.
Employee Taxation of Qualified Wage Payments
The FFCRA does not provide any explicit exemption for qualified wage payments. Accordingly, such amounts are generally taxable income to the employee, unless a different exclusion or exemption applies. Note that while the COVID-19 pandemic is a federally declared disaster, such payments are not eligible for exclusion under Section 139 of the Code applicable to qualified disaster relief payments. Qualified disaster relief payments do not include income replacement such as sick leave or other paid time off paid by an employer. Normal income tax withholding rules apply, and amount paid are subject to withholding and payment of social security and Medicare tax.
Rules that generally apply for employer sponsored health plans, 401(k) contributions and other benefits generally apply. The FFCRA does not provide any provision that explicitly prohibits such deductions. Accordingly, the applicable provisions of the relevant plan will apply.
The FAQs also contain various pieces of information regarding how a self-employed individual calculates and claims the credit, and use of third-party payers.