On March 31, 2020, the IRS issued “COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs” to help small and midsize employers navigate the tax relief available under the Families First Coronavirus Response Act (“FFCRA”).
As we have previously reported, for employers with less than 500 employees, the FFCRA provides for additional paid leave for employees who are unable to work due to certain qualifying COVID-19-related reasons (see Families First Coronavirus Response Act: What Employers Need to Know).
The IRS FAQs provide additional guidance on a number of important aspects of the FFCRA tax relief, including:
- When can employers get tax relief: employers will claim the credits on their federal employment tax returns but can benefit more quickly from the credits by reducing their federal employment tax deposits. If their tax deposits are less than the available tax credits, the FAQs explain that employers may request an advance payment of the credits by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19.
- What is covered by the tax credit: The credit covers emergency paid sick leave and emergency paid family leave that is provided for under the FFCRA as well as the employer’s share of Medicare tax owed on those payments. In addition, it includes the health plan costs paid by the employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions during the qualifying leave period.
- What documentation do you need to support the requested tax credit: employers will need to substantiate eligibility for the sick leave or family leave credits. To do so, they will need a written request for the leave from the employee that sets forth (i) employee’s name; (ii) date or dates for which leave is requested; (iii) a statement by the employee as to which of the COVID-19 related reasons the employee is requesting leave and written support for such reason; and (iv) a statement from the employee that the employee is unable to work, including by means of telework, for such reason.
The IRS FAQs further explain that if the leave is based upon a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine 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.
If the leave request is based on a school closing or child-care provider unavailability, additional details should be included in the employee statement supporting the need for leave, including:
- the name and age of the child (or children) to be cared for,
- the name of the school that has closed or place of care that is unavailable,
- a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave, and
- if the school closing or child-care provider leave is for a child who is older than fourteen and the employee is expected to work during daylight hours, the employee’s statement should set forth the special circumstances that require the employee to provide care.
- What taxes apply to qualified leave payments under the FFCRA: qualified sick leave wages and qualified family leave wages are wages subject to withholding from the employee of federal income tax and the employee’s share of social security and Medicare taxes. Qualified leave wages are also considered wages for purposes of other benefits that the employer provides, such as contributions to 401(k) plans. However qualified leave payments are not subject to the employer’s share of social security tax. Additionally, the employer receives an additional credit for the employer’s share of Medicare tax, effectively exempting qualified leave wages from the employer’s share of Medicare tax. The employer must include the full amount of the credits for qualified sick leave wages and qualified family leave wages (and any allocable qualified health plan expenses and the employer’s share of the Medicare tax on such qualified leave wages) in the employer’s gross income. The employer may deduct as a business expense the amounts paid to an employee for qualified sick leave wages and qualified family leave wages (and any allocable qualified health plan expenses and the employer’s share of Medicare tax on such qualified leave wages) for which the employer expects to claim the tax credits under the FFCRA, if the employer is otherwise eligible to take such a deduction.
- Interaction with Other CARES Act Tax Programs. The IRS guidance explains that taking tax credits for FFCRA payments does not preclude an employer from also participating in Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) programs, including Small Business Interruption Loans and the Employee Retention Credit. However, the IRS guidance also makes clear that employers cannot use the same wages payments for different benefits. In other words, if an employer is taking FFCRA tax credits for FFCRA wage payments, those wage payments will not count as “eligible payroll costs” for purposes of determining a Small Business Interruption Loan amount and subsequent forgiveness under the CARES Act. Likewise, the qualified wages for the 50% employee retention credit under the CARES Act do not include the amount of qualified leave wages for which the employer received tax credits under the FFCRA.
We will continue to post updates as further guidance is issued as to the FFCRA and the CARES Act. Check Orrick’s COVID-19 Resource Center for other COVID-19 related information.