The Families First Coronavirus Response Act (FFCRA), which was enacted on March 18, 2020, established two new categories of paid leave to assist workers needing time off for certain coronavirus-related purposes: (1) up to two weeks of paid sick leave, and (2) up to ten weeks of paid FMLA leave. These paid leave mandates apply to private sector employers with fewer than 500 employees and public sector employers of any size.
Although the FFCRA requires covered employers to provide these new types of paid leave to qualifying employees, it establishes a process for eligible employers to obtain reimbursement from the federal government for the cost of the paid leave through refundable credits against Social Security payroll taxes. The tax credit is available to all private sector employers that are subject to the FFCRA paid leave mandates, regardless of the type of entity (C corporation, S corporation, partnership, LLC, or sole proprietorship). Public sector employers are expressly excluded from eligibility for the tax credit, although they are subject to the paid leave mandates. Private sector employers with 500 or more employees also are not eligible for the credit, even if they voluntarily provide paid leave that mirrors the FFCRA requirements.
An eligible employer’s payroll tax credit for each calendar quarter is an amount equal to 100% of the qualified sick leave wages and 100% of the qualified family leave wages paid by such employer for the quarter. The credit is limited to the maximum amount of the paid leave required to be paid under the FFCRA. Any paid leave provided in excess of the maximum requirement is not creditable.
The amount of the credit also includes the following:
- The employer’s qualified health plan expenses that are properly allocable to the qualified sick leave wages and qualified family leave wages for which the credit is allowed. This generally refers to the amount of non-taxable health plan premiums paid by the employer for an affected employee, to the extent allocable to mandatory paid leave amounts. Guidance from the IRS is anticipated to help determine how health plan premiums are to be allocated among wages paid by an employer.
- The Medicare taxes paid by the employer with respect to the qualified sick leave wages and qualified family leave wages for which the credit is allowed. (Qualified sick leave wages and qualified family leave wages are exempt from Social Security taxes.)
The amount of the credit allowable for any quarter cannot exceed the amount of Social Security taxes owed by the employer for that quarter with respect to all employees. However, any credit in excess of this quarterly limit is treated as an overpayment that is eligible for refund to the employer.
To ensure there is no double tax benefit with respect to the payroll tax credit, the amount of the tax credit must be included in the employer’s taxable income. This income generally will be offset by a deduction for the wages paid, although any employer that is unable to deduct the wages in the same year in which the credit is received (e.g., if they are required to capitalize some or all of the paid leave amounts) would experience a timing difference.
Wages for which this payroll tax credit is claimed are not also eligible for the separate tax credit under Internal Revenue Code Section 45S for paid family and medical leave.
Regarding the mechanics of claiming the tax credit, the IRS has announced an accelerated process. Eligible employers will be able to retain an amount of payroll taxes equal to the amount of qualifying paid leave that they provide, rather than deposit those payroll taxes with the IRS.
The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes (FICA taxes), and the employer share of FICA taxes with respect to all employees — not just employees for whom the paid leave was provided.
If there are not sufficient payroll taxes to cover the cost of all qualifying paid leave provided, employers will be able file a request for an accelerated payment from the IRS. The IRS has said it expects to process these requests in two weeks or less. The details of this expedited procedure, including a form to be used to request the accelerated payment, are expected to be announced soon.
The following examples illustrate how this process is intended to operate:
- Example 1: An eligible employer pays $5,000 in qualifying paid leave and is otherwise required to deposit $8,000 in payroll taxes (FICA taxes and withheld federal income tax) relating to all its employees. The employer may use up to $5,000 of the $8,000 of taxes it was going to deposit to fund the qualified leave payments. The employer would only be required to deposit the remaining $3,000 on its next regular deposit date.
- Example 2: An eligible employer pays $10,000 in sick leave and is required to deposit $8,000 in payroll taxes (FICA taxes and withheld federal income tax) relating to all its employees. The employer may use the entire $8,000 of payroll taxes to fund the qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
Equivalent child-care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax returns and will reduce estimated tax payments.