As part of the Families First Coronavirus Response Act (FFCRA), signed by President Trump on March 18, 2020, certain employers (based on workforce size) must provide expanded paid sick leave and paid family leave to employees affected by COVID-19. Additional analysis on the FFCRA can be found here and here.
The FFCRA refers to these payments as “qualified sick leave wages” and “qualified family leave wages.” To fund the mandated paid leave, the FFCRA provides employers with a refundable tax credit against the employer’s Social Security and Medicare tax obligations otherwise owed in 2020.
The same tax credit is available with respect to any health insurance premiums the employer pays for employees receiving qualified sick leave wages or qualified family leave wages (referred to as “qualified health plan expenses”). The FFCRA acknowledged that the Secretary of the Treasury would need to issue more detailed guidance on how the tax credit would work in practice, but at first blush the proposed tax credit seemed quite anemic.
Additional details provided by the IRS can be viewed here.
Social Security and Medicare Tax Credits
Specifically, the FFCRA talks of applying the tax credit to the employer’s quarterly Social Security and Medicare tax obligations. This suggested that employers would need to front payments for qualified sick leave wages and qualified family leave wages, but not be able to recoup their mandated wage payments until the end of each calendar quarter.
- The FFCRA also noted that if an employer was unable to fully utilize its tax credit during the balance of 2020, it could seek a refund for the unused portion.
Another concern is that an employer’s Social Security and Medicare tax obligations generally equal 7.65 percent of the wages paid to an employee. This means that if an employer paid $1,000 in qualified sick leave wages or qualified family leave wages, the employer would then need to pay approximately $13,000 in future wages to generate enough Social Security and Medicare taxes to apply against the available $1,000 tax credit.
For businesses facing a massive slow-down, if not an outright shut-down (albeit hopefully just a temporary one), the promise of valuable tax credits tied to future payroll was greeted with skepticism—for an employer wondering how it was going to make payroll two weeks from now, a tax credit against future payroll taxes might be too little, too late.
IRS Clarification on FFCRA Tax Credits
On March 20, 2020, the IRS published some encouraging clarifications on its website. There, the IRS promised more detailed guidance would be coming the following week (March 22-28), but highlighted some significant points.
The IRS announcement promised an accelerated process for employers to recover a refund of the tax credit. This too is good news, suggesting that employers need not wait until the end of 2020 to file for a refund on the tax credit.
Tax Credit Applied Against All Payroll Withholdings
The IRS also noted that the amounts expended by an employer for qualifying leave payments could be offset against all payroll withholding taxes. This means that in addition to the employer’s Social Security and Medicare taxes, the employer can also apply the credit against amounts withheld from wages for the employees’ share of the Social Security and Medicare taxes, as well as withheld income taxes. This greatly accelerates an employer’s ability to utilize the tax credit.
To illustrate the points, the IRS provided 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 law 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.
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 return and will reduce estimated tax payments.
A number of questions remain unanswered, but the announcement on the IRS website demonstrates government regulators are anticipating the real concerns of employers. Stay tuned for the additional promised guidance.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.