Updates in the Law
The Families First Coronavirus Response Act (“FFCRA”) requires employers to provide paid leave to their employees through the Emergency Paid Sick Leave Act (“EPSLA”), and the Emergency Family and Medical Leave Expansion Act (“EMFLEA”). Eligible employers who make payments to their employees pursuant to these Acts are entitled to refundable tax credits that reimburse them for those payments. Self-employed individuals who regularly carry on a trade or business and would be entitled to receive comparable sick or family leave wages under FFCRA if the individual were an employee of an eligible employer (other than himself or herself) are also eligible for these tax credits when they file their individual income tax return.
Tax Credits Available Under EPSLA and EMFLEA
Eligible employers are entitled to receive a refundable tax credit in the full amount of the qualified sick leave wages paid under EPSLA and the qualified family leave wages paid under EMFLEA, plus the allocable qualified health plan expenses for the employee and the employer’s share of Medicare tax paid for leave during the period beginning April 1, 2020 and ending December 31, 2020. The tax credit does not apply to Social Security taxes because the eligible employers are not subject to the employer portion of Social Security taxes imposed on the sick and family leave wages. The tax credit is allowed against the employer portion of Social Security taxes on all other wages and compensation paid to all employees. If the amount of the credit exceeds the employer portion of these federal employment taxes, the excess is treated as an overpayment and refunded to the employer.
Qualified health plan expenses for which a refundable tax credit is available include amounts paid or incurred by the eligible employer to provide or maintain a group health plan, but only to the extent that those amounts are excluded from the gross income of employees. Generally, the tax credits for qualified sick leave wages under EPSLA and qualified family leave wages under the EMFLEA are increased by the qualified health plan expenses allocable to each type of qualified leave wages. Proper allocation of qualified health plan expenses to qualified sick or family leave wages is done by allocating such expenses on a pro rata basis among covered employees and pro rata on the basis of periods of coverage.
Claiming the Available Tax Credits
Eligible employers will report their total qualified leave wages to the Internal Revenue Service (“IRS”) and claim the related credits for each quarter on their federal employment tax returns, which in most cases will be Form 941, Employer’s Quarterly Federal Tax Return. All federal income taxes, Social Security taxes, and Medicare taxes withheld from employee wages by the employer, as well as the employer’s share of the Social Security taxes and Medicare taxes, are reported on Form 941.
A quicker way for eligible employers that pay qualified sick and family leave wages to benefit from the tax credits will be to retain the amount of all federal employment taxes equal to 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. The federal employment taxes that are available for retention by eligible employers include federal income taxes withheld from employees’ wages, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes with respect to all employees.
If the federal employment taxes that would otherwise be deposited with the IRS are less than the available tax credits for the eligible employer’s cost of qualified sick and family leave wages, plus qualified health plan expenses and the employer’s share of Medicare taxes on those wages, the employer will be able to file a request for an advance payment from the IRS for the excess credits by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will account for the amounts received as an advance when it files its Form 941 for the relevant quarter. The IRS expects to begin processing the advance payment requests during April 2020.
Eligible employers will not be subject to a penalty for failing to deposit federal employment taxes related to qualified sick and family leave wages, the allocable qualified health plan expenses, and the employer’s share of the Medicare taxes on such wages, in a calendar quarter if:
Eligible employers must substantiate eligibility for the sick leave or family leave tax credits by receiving a written request for such leave from the employee in which the employee provides specific information. We provided more detail regarding the information needed from employees seeking benefits under EPSLA and EMFLEA in a previous message sent to you.
Coordination with CARES Act Credits
Eligible employers who meet the requirements for tax credits under FFCRA and for the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) may receive both credits, but not for the same wage payments. Also, if an eligible employer receives tax credits for qualified leave benefits, those wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness under the CARES Act.
The IRS has issued helpful guidance and posted 66 detailed Frequently Asked Questions (“FAQ’s”) on its website that provides additional information regarding the COVID-19-related benefits and tax credits available through FFCRA that are discussed in this article. If you have any questions about the benefits and tax credits available under FFCRA, please do not hesitate to contact our office.