Recently passed legislation related to the COVID-19 epidemic included payroll tax credits for employers to pay for certain mandated sick and family leave wages and to cover wages employers elect to pay to retain employees, despite being financially impacted by the epidemic.
Below is a summary of the tax credits followed by a description of which employers are eligible for the tax credits, how the credits are calculated, and how employers can obtain the financial benefit of the credits.
FAMILIES FIRST CORONAVIRUS RESPONSE ACT
The Families First Coronavirus Response Act (“FFCRA”), requires employers with less than 500 employees to provide up to 80 hours of paid sick leave (i) the Employee Paid Sick Leave Act (“EPSL”) and the Emergency Family and Medical Leave Expansion Act (“Expanded FMLA”). Self-employed individuals are eligible to take the credit, but can not receive an advance using Form 7200.
Emergency Paid Sick Leave (EPSL) – effective date 4/1/20
Employers must provide up to 80 hours of fully-paid sick leave if the employee is unable to work or telework due to being quarantined, self-quarantined, or has COVID-19 OR up to 80 hours of leave at two-thirds pay if the employee is caring for children who are home because their schools or places of care are closed or care is unavailable due to the impact of COVID-19. Employees are entitled to paid leave under the EPSL if the employee is unable to work or telework because the employee:
- is subject to a federal, state, or local quarantine or isolation order related to COVID-19;
- has been advised by a health care provider to self-quarantine due to reasons related COVID-19;
- is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
- is caring for a person subject to a quarantine or isolation order related to COVID-19 or who has been advised by a health care provider to self-quarantine due to reasons related to COVID-19;
- is caring for a child of the employee whose school or place of care is closed (or whose childcare provider is unavailable) due to reasons related to COVID-19; or
- is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.
Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.
Expanded Family Medical Leave (EFMLA)
Employers are required to provide an additional 10 weeks of leave at two-thirds pay if the employee is caring for children who are home because their schools or places of care are closed (or their child care providers are unavailable) due to the impact of COVID-19. Employees must have been employed for at least 30 days to qualify.
Employees are eligible for paid leave under the EFMLA only if the employee is unable to work or telework in order to care for to a child whose school or place of care is closed (or whose childcare provider is unavailable) for reasons related to COVID-19. Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue.
Special emphasis has been noted in the recently released IRS and DOL guidance to clarify that employees are not eligible for EPSL or EFMLA due to financial impact to the employer or lack of work available (even if related to COVID-19).
CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES Act)
The CARES Act encourages eligible employers who are financially impacted as a result of COVID-19 stay at home and isolation orders to retain their employees. Employers are not required to pay employees under the CARES Act Retention Credit, but must do so in order to receive the benefit of the tax credits (“employee retention credits”).
The credit available to eligible employers for employee retention is limited to an amount equal to 50 percent of “qualified wages” that the employers pay to their employees. Qualified wages are wages paid by an eligible employer to employees after March 12, 2020, and before January 1, 2021. Qualified wages include the eligible employer’s qualified health plan expenses that are properly allocable to the wages.
Am I eligible?
Qualifying employers must fall into one of two categories:
- The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter; or
- The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter.
These measures are calculated each calendar quarter.
What Wages Qualify?
Whether wages are qualified wages also depends on the average number of full-time employees employed by the eligible employer during 2019. Generally, a “full-time employee” means an employee who is employed on average at least 30 hours of service per week.
If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee during a period the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts.
If an eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship.
How Much is Covered?
The maximum amount of qualified wages taken into account with respect to each employee, for all calendar quarters is $10,000, so that the maximum amount of the employee retention credit for an eligible employer for qualified wages paid to each employee is $5,000.
Eligible employers may not receive both the employee retention credit and a small business interruption loan under the paycheck protection program under the CARES Act.
Employers are eligible to claim both credits under the FFCRA and CARES Act, but the amount of qualified wages for which an employer may claim the credit under the CARES Act does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
Note: One question requiring clarification from the IRS is whether an employer that moves to tele-working could take the position that they had experienced a partial shutdown for purposes of determining qualified wages if the employer did so prior to a government restriction on going to work.
PAYING FOR & CLAIMING THE COVID-19 TAX CREDITS
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits exceed the credit, the employer may receive an advance payment from the IRS by submitting Form 7200.
Employers eligible for advance payments of the three credits can find IRS Form 7200 (advance Payment of Employer Credits Due to COVID-19 ) HERE.
Example: Advance Payments of COVID-19 Tax Credits
The instructions to Form 7200 contain the following example showing how an employer could reduce its employment tax deposits and claim an advance payment for the excess of the employer’s credit over the amount of the retained tax deposits:
An employer entitled to a $10,000 credit under the CARES Act that is required to deposit $8,000 in employment taxes could retain the entire $8,000 of taxes as a portion of the tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using Form 7200.
The tax credits available under the FFCRA and the employee retention credit available under the CARES Act are claimed by reporting total qualified sick and family leave wages and qualified wages, respectively, and the related credits for each calendar quarter on the employer’s federal employment tax returns (generally, Form 941, Employer’s Quarterly Federal Tax Return).
The FFCRA and CARES Act tax credits are allowed against the employer portion of Social Security taxes (also known as the Old-Age, Survivors, and Disability Insurance tax), which equals 6.2 percent of employee wages for each calendar quarter. However, the credits are fully refundable. What this means is that if, for any calendar quarter the amount of the credit is more than the employer’s Social Security tax liability for that quarter, the excess may be applied to offset all other federal employment taxes owed by the employer for that quarter. In other words, employers may obtain the financial benefit of the credits for a quarter by retaining, and not depositing with the IRS, withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes, with respect to all employees for the quarter, up to the amount of the credits.
We will be hosting a webinar to answer questions and provide an overview of the FFCRA and CARES Act payroll tax credits on Friday April 10. Please email email@example.com for a registration link.
We are happy to discuss any questions or comments you may have. Our team is working and available to review with you. Please contact our office at 610-544-5900 or firstname.lastname@example.org .
We are in this together,
Brinker Simpson & Company, LLC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice & cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).