Emerging Markets Law

Updated - Families First Coronavirus Response Act–Payroll Tax Credits for Required Paid Sick and Family Leave

Coronavirus

Under the Emergency Family and Medical Leave Expansion Act (the “FFCRA”), employers who have fewer than 500 employees are required to provide emergency sick and family leave if an employee must take leave from work due to a coronavirus related event or condition under the Family Medical Leave Act (FMLA). 

The FFCRA provides for tax credits that correspond with these required leave payments and are intended to reimburse an employer therefor, dollar for dollar, up to the maximum amount that is required to be paid by the employer.  Employers are free to pay sick and family leave wages above the limit of “qualified sick and family leave wages,” but no tax credit will be permitted for such increased payments.  In addition to the employer paid leave credits, the FFCRA provides a corresponding tax credit mechanism for self-employed individuals.  In all cases, the tax credits will be applied to reduce actual tax liability due, as opposed to merely reducing the figure upon which tax is calculated, like a deduction. In addition, the credits are available for use in advance of the end of the tax year. 

Employer Paid Leave Credits

FFCRA allows for a credit in an amount equal to 100 percent of each of the “qualified sick leave wages” and “qualified family leave wages” paid by an employer.  Credits (1) are based on qualified sick and family leave wages paid for each calendar quarter during the period from April 1 to December 31, 2020, (2) may be increased by the amount of the employer’s qualified health plan expenses that are allocable to the qualified sick and family leave wages for which such credit is permitted, and (3) are used to offset the employer’s total federal withholding tax liability for the applicable calendar quarter.  To the extent that the credits are in excess of the employer’s total federal withholding tax liability, the employer will be entitled to refund for the difference. 

Qualified sick leave wages, and the corresponding tax credit, for each employee, are each limited to $511 per day, up to 10 days ($5,110 total), in the event the employee:

  1. is subject to a governmental quarantine/isolation order,
  2. has been advised by a medical professional to quarantine (based on health care provider’s belief that the employee has COVID-19, may have COVID-19 or is particularly vulnerable to COVID-19), or
  3. is experiencing symptoms of COVID-19 (fever, dry cough, shortness of breath or other COVID-19 symptoms identified by the CDC) and is seeking a diagnosis,

or limited to $200 per day, up to 10 days ($2,000 total), if the employee:

  1. is caring for someone under a governmental quarantine/isolation order (must be immediate family member, roommate or similar person with whom the employee has a similar personal relationship); or
  2. is caring for someone who has been advised by a medical professional to quarantine (must be immediate family member, roommate or similar person with whom the employee has a similar personal relationship); or
  3. is caring for the employee’s minor child or child incapable of self-care because of mental or physical disability, if the child’s school or day care provider is unavailable due to COVID-19 precautions.

Qualified sick leave wages are paid regardless of how long an employee has been employed by the employer, except that an employer may exclude health care workers and emergency responders from taking paid sick leave.

Qualified family leave wages are wages paid by an employer to an employee who has been an employee for at least 30 calendar days and who must take leave due to the need to care for the employee’s minor child or child incapable of self-care because of mental or physical disability, if the child’s school or day care provider is unavailable due to a public health emergency during the 2020 calendar year.  The first ten (10) days of such leave is unpaid, and thereafter such wages, and the corresponding tax credit, for each employee, are each limited to $200 per day, or up to a total of $10,000 for the remainder of the 2020 calendar year.

To allow employers immediate benefit of the credits, the Internal Revenue Service (“IRS”) is permitting employers to use their anticipated credit amounts to offset payroll taxes that would have otherwise been due. Employers may use all federal withholding taxes set aside (including the employee’s portion held by the employer in trust), up to an amount of the anticipated total credit for each calendar quarter, to instead make payments of qualified sick and family leave wages to employees who must take leave from work due to a covered coronavirus-related event or condition.  To the extent that funds set aside by an employer are not sufficient to pay such wages, an employer may file for an advance for the remaining amount to be paid by filing a Form 7200 (Advance of Employer Credits Due to COVID-19), which the IRS will begin processing in April 2020.  The advance credits claimed on Forms 7200 will need to reconcile with the Forms 941 (Employer’s Quarterly Federal Tax Return) for the applicable calendar quarter.

Employers must retain (1) records supporting each employee’s reason for leave to substantiate the claim for receiving payment of the advance credit, (2) the Forms 941 – Employer’s Quarterly Federal Tax Return, and (3) Forms 7200 – Advance of Employer Credits Due to COVID-19.

Tax Credits for Self-Employed Individuals

FFCRA provides for comparable credits for self-employed individuals who are actively engaged in a trade or business— FFCRA Section 7002 allows for a credit in an amount equal to the “qualified sick leave equivalent amount,” and Section 7004 allows for a credit in an amount equal to 100 percent of the “qualified family leave equivalent amount.”  The credits allowed under Section 7002 and Section 7004 apply to offset the self-employed individual’s income tax liability for the 2020 calendar year. 

Under most circumstances, the “qualified sick leave equivalent amount” is an amount equal to (1) the lesser of $200 per day or 67 percent of the average daily self-employment income for the taxable year, (2) multiplied by the number of days the individual would be entitled to sick leave under FMLA if the individual were an employee (limited to 10 days).  If an individual cannot  work due to a governmental quarantine/isolation order or advice by a medical professional to quarantine, however, or if the individual is experiencing symptoms of COVID-19 and is seeking a diagnosis, then the “qualified sick leave equivalent amount” is an amount equal to (1) the lesser of $511 per day or 100 percent of the average daily self-employment income for the taxable year, (2) multiplied by the number of days the individual would be entitled to sick leave under FMLA  if the individual were an employee (limited to 10 days). 

The “qualified family leave equivalent amount” is an amount equal to (1) the lesser of $200 per day or 67 percent of the average daily self-employment income for the taxable year, (2) multiplied by the number of days the individual would be entitled to sick leave under FMLA if the individual were an employee (limited to 10 days). 

An individual’s average daily self-employment income is an amount equal to the net earnings of the individual for the calendar year divided by 260.

Credits allowed for the “qualified sick leave equivalent amount” and the “qualified family leave equivalent amount” may be claimed on the self-employed individual’s personal tax return, and any excess in credits over total tax liability will be refunded to the self-employed individual at that time.  Until it is time to file tax returns for the 2020 calendar year, a self-employed individual may use estimated credits to offset the amount of estimated taxes otherwise due for each calendar quarter.

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