The Families First Coronavirus Response Act (H.R. 6201) was signed into law by President Trump on March 18, 2020. It requires covered employers to provide for paid emergency sick and family leave. The new law provides a tax credit against employment or self-employment taxes in order to offset the costs for the leave required for employees under the Act. The legislation aims at providing small- to mid-sized employers the opportunity to retain employees while affording them the leave necessary to address the COVID-19 pandemic.
The Act provides employers with an employer payroll tax credit equal to the qualified sick leave wages paid by the employer under the Act, capped at two-thirds of the employee’s normal rate of pay, subject to a maximum of $200 per day up to 10 days (i.e., $2,000 in the aggregate per employee). However, the credit increases to 100% of the employee’s normal rate of pay up to $511 per day up to 10 days (i.e., $5,110 in the aggregate per employee) in the case of any day in which sick leave is made to an employee who is quarantined or is experiencing symptoms and seeking advice of a medical professional.
The legislation aims at providing small- to mid-sized employers the opportunity to retain employees while affording them the leave necessary to address the COVID-19 pandemic.
The Act also provides employers with an employer payroll tax credit equal to 100% of the qualified family leave wages paid by the employer under the Emergency Family and Medical Leave Expansion Act. The credit is available for up to $200 of paid qualified family leave wages per employee for each day the employee receives qualified family leave wages, not to exceed $10,000 per quarter for one employee. The amount of the credit is increased by the amount of Medicare tax that’s imposed on the qualified family leave wages.
Further, the Act allows for the credit amounts (both for required paid family leave and paid sick leave) to be increased by the amount of the employer’s group health plan expenses that are properly allocated to the qualified emergency leave and sick leave wages. It’s expected that the Department of Treasury will issue allocation rules.
How to claim the payroll credit
When an employer pays an employee wages, the employer is required to withhold federal income taxes and the employee’s share of Social Security and Medicare taxes (collectively referred to as “Payroll Taxes”) from the employee’s wages. An employer is then required to deposit these payroll taxes, along with the employer share of Social Security and Medicare taxes, with the Internal Revenue Service (IRS) and file quarterly payroll tax returns (Form 941) with the IRS.
The IRS has stated, under guidance which is forthcoming, that eligible employers who pay qualifying sick or family leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and family leave the employer paid, rather than deposit the withheld payroll taxes with the IRS.
If there aren’t sufficient payroll taxes to cover the cost of qualified sick and family leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests within two weeks. The details of this new, expedited procedure will be announced the week ending March 27.
If the amount of the credit exceeds the payroll taxes due, then the excess will be treated as an overpayment that is refundable.
The IRS provides the following example:
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 under the Act to deposit the remaining $3,000 on its 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 credit for the remaining $2,000.
If an employer would like to use the payroll tax credit to fund the qualified sick leave or the qualified family leave, then the employer would need to work with the appropriate payroll providers to ensure that applicable payroll tax withholdings are not remitted to the IRS. The employer could then use the payroll taxes, that would otherwise be remitted to the IRS, to fund the qualified sick or family leave.
We recommend employers contact their payroll providers immediately in order to ensure a process is in place where the applicable payroll taxes are not remitted. Until formal guidance is issued by the IRS regarding the credit reporting process, employers should be sure to contemporaneously document the following information: (1) the type of leave being provided and the qualified wages; and (2) calculations to substantiate and report the credits.
We recommend employers contact their payroll providers immediately in order to ensure a process is in place where the applicable payroll taxes are not remitted.
Employers that have questions regarding this legislation should contact a member of Plante Moran’s National Tax Office or employee benefits consulting group for further assistance.