What Employers Need to Know About Claiming Payroll Tax Credits Under FFCRA
The Families First Coronavirus Response Act (the "FFCRA"), signed into law on March 18, 2020, provides small and midsize employers refundable tax credits that reimburse them for the cost of providing paid sick and family leave wages to their employees for certain qualifying leaves related to COVID-19. Late yesterday, the IRS issued guidance on the payroll tax credits under the FFCRA, available here https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs.
What Is Included?
An Eligible Employer (fewer than 500 employees and required under the FFCRA to pay “qualified sick leave wages” and/or “qualified family leave wages”) is entitled to a fully refundable tax credit equal to the required paid sick leave and/or the required paid family and medical leave. The tax credit also includes the employer’s share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the qualified leave period (qualified health plan expenses). In addition, the employer is not subject to the employer portion of social security tax imposed on those wages.
(Note: There are certain exceptions for employers subject to the Railroad Retirement Tax Act. Also, although the FFCRA requires most government employers to provide paid leave, it does not entitle those governmental employers to tax credits for this leave.)
The IRS guidance also provides specifics on how self-employed individuals can claim the tax credits.
What Amount Can Be Claimed?
The credits cover 100 percent of up to ten days of the qualified sick leave wages and up to ten weeks of the 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 employer’s share of Medicare taxes imposed on those wages.
The IRS Guidance provides this 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 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 for which the employer is liable on any wages paid in Q2 2020. Any excess over the federal employment tax liabilities is refunded in accord with normal procedures. The employer must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid.
What Time Period Applies?
Eligible Employers may claim tax credits for qualified leave wages paid to employees for leave taken from April 1, 2020 to December 31, 2020. Thus, employers who paid for this type of leave before April 1, 2020, appear to be ineligible for the credit for pre-April 1 payments.
How Does The Employer Claim The Credit?
Eligible Employers will report their total qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on those leave wages) for each quarter on their federal employment tax return, usually Form 941, Employer's Quarterly Federal Tax Return. Eligible Employers that pay qualified leave wages will be able to retain 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. If the federal employment taxes yet to be deposited are not sufficient to cover the Eligible Employer’s cost of qualified leave wages, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, the employer will be able file a request for an advance payment from the IRS. The IRS expects to begin processing these requests in April 2020.
What Records Are Required To Be Kept?
Eligible Employers claiming the credits should retain records and documentation supporting each employee’s leave to substantiate the claim for the credits (see below), the employer’s notice that the leave was granted, the leave wages paid to the employee, the allocable qualified health plan expenses, and the employer’s share of Medicare tax on those leave wages, and retain the Forms 941, Employer's Quarterly Federal Tax Return, and 7200, Advance of Employer Credits Due To COVID-19, and any other applicable filings made to the IRS requesting the credit.
How Should The Employer Sustain Eligibility For Credits For Specific Employee Leaves?
An Eligible Employer will substantiate eligibility for the sick leave or family leave credits if the employer receives 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.
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/isolation 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.
In the case of a leave request based on a school closing or child care provider unavailability, the statement from the employee should include the name and age of the child (or children) to be cared for, the name of the school/place of care that is unavailable, and a representation that no other person will be providing care for the child during the period for which the employee is receiving paid leave and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.