The Families First Coronavirus Response Act (“FFCRA”) was incorporated into law on March 18, 2020. Under the FFCRA, certain employers are required to grant employees paid sick leave and family medical leave until December 31, 2020.FFCRA also provides a refundable tax credit for those paid leave. The IRS and Department of Labor issued Press Release 2020-57 on March 20, 2020, addressing various issues under the FFCRA, and issued a guidance below on March 27, 2020. Most recently, the 2020 COVID-related Tax Relief Act (the “Act”), which went into effect on December 27, 2020, extended the tax credit to March 31, 2021. Additionally, the IRS updated its Frequently Asked Questions about the FFCRA on March 28, 2020 January 2021 to reflect changes in the law.
The FFCRA requires employers who employ fewer than 500 workers to take paid sick leave and family leave (employers with fewer than 50 workers may apply to the Department of Labor for waivers). For information on how the number of employees is measured and how employers with fewer than 50 employees can request relief, please see our customer notification here. Employers can reimburse the cost of providing the services required by the FFCRA by applying for refundable income tax credits for qualifying sick leave wages and qualifying family leave wages paid for the period April 1, 2020 through December 31, 2020. Similar self-employed tax credits are also granted to certain eligible self-employed.
The law did not extend the FFCRA’s obligation to provide paid sick leave and family leave. Otherwise, eligible employers who voluntarily continue to grant paid sick leave and family medical leave until March 31, 2021 can continue to reimburse the costs of providing these services through the income tax credit. The legitimate reasons for providing sick leave or family leave, as well as the limitation on qualified wages for applying for the tax credit, have not changed.
Non-tax aspects of the FFCRA are discussed in our previous warning here. This customer notification explains the tax credits that are available to employers and the self-employed.
Payroll for qualified sick leave wages and qualified family leave wages
Employers who grant paid sick leave or family leave to their employees are generally required to withhold income tax and the employee’s share of Social Security and Medicare taxes from an employee’s wages. Employers must also pay the government the employer’s share of Social Security and Medicare taxes, as well as federal unemployment taxes (“FUTA”).
For the wage periods between April 1, 2020 and December 31, 2020, the FFCRA requested employers with fewer than 500 employees to grant their employees affected by COVID-19 (i) paid sick leave (“qualified sick leave wage”). or (ii) paid family leave for workers who have to miss their work (and cannot telework) to care for their underage child whose school or daycare is closed (“Qualified Family Leave Wage”). Employers were allowed to claim refundable tax credits on their Social Security and Medicare tax liability for Qualifying Sick Leave Wage and Qualifying Family Leave Wage equal to the amount of Qualifying Sick Leave Wage and Family Holiday Wage they paid for the payment periods between April 1, 2020 and December 31, 2020. The law allows employers who continue to give paid sick and family leave between January 1, 2021 and March 31, 2021 to claim the payroll tax credit during that period.
The amount of employer’s spending on a qualified health insurance plan that is appropriately allocated to qualified sick leave wages or qualified family leave wages may increase the amount of credits to the extent that those wages are excluded from gross earnings of employees under Section 106 (a).
The credits are subject to a number of restrictions.
- Sick pay per employee is capped at a maximum of $ 511 per day for a maximum of 10 days if the employee is on sick leave to support themselves and to $ 200 per day for a maximum of 10 days if the employee is on sick leave to care for one to take care of family member or child when the child’s school or daycare is closed.
- Qualifying Family Vacation Wage per employee eligible for quarter credit cannot exceed $ 200 per day for a total of $ 10,000.
- The US government, state governments, or any political division, agency, or instrumentality thereof may not draw credit.
- The credits cannot exceed the employer’s Social Security and Medicare tax liability for the quarter, but the employer may request a refund for amounts that exceed this limit.
Employers who apply for the loan must increase their gross income by the loan amount. Wages that are taken into account when calculating wages and salaries cannot be taken into account when calculating the credit for paid family and sick leave in accordance with Code 45S. Employers who qualify for both the Code Section 45S loan and the new FFCRA loan should therefore consider which loan is more advantageous.
Credits for certain self-employed
Equivalent credits are granted for the self-employed. Eligible self-employed persons can: (i) apply for a refundable self-employed tax credit equal to 100% (reduced to 67% in certain cases) of their “Qualified Sick Leave Equivalent” (based on their sick days); and (ii) a self-employment tax credit based on a qualifying family leave equivalent (based on the days they cannot work because they have to care for a sick family member or children). In any case, the “equivalent value” must be reduced if the self-employed person also works as an employee and receives wages paid by an employer for which the employer can apply for credits under the FFCRA.
Instructions for claiming the credits
The 2020-21 Notice provides that eligible employers can apply for the credits for wages paid for the period April 1, 2020 through December 31, 2020. This period has been extended by law to March 31, 2021 for eligible employers who continue to grant paid leave. Eligible Employers who pay Qualified Sick Leave Wages or Qualified Family Leave Wages may withhold an amount of income tax up to those wages paid in lieu of filing them with the IRS. Wage taxes that employers can withhold include withheld federal income taxes, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes. Notice 2020-22 provides that an employer will not be subject to the penalty under Code Section 6656 for failing to post withheld income tax in a timely manner, provided the amount withheld is less than or equal to the amount of the expected loan. If the wage tax withheld is insufficient to cover the cost of qualified sick leave and family leave, employers can file Form 7200 (Prepayment of Employer Credit Due to COVID-19) to apply for expedited payment with the IRS. The IRS expects these requests to be processed in two weeks or less. However, an employer cannot apply for an upfront credit by submitting Form 7200 in relation to the expected credits that they relied on in reducing their deposits.
For more information about the FFCRA, the law, or how it affects your business, please contact one of our labor or tax lawyers. IRS News Release 2020-57 and Notice 2020-21 are available here. The IRS Frequently Asked Questions page on many questions under the FFCRA (and the changes in the law) can be found here.
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