Tax Update – Families First Coronavirus Response Act
Provides Tax Credits to Both Employers and the Self-Employed
On Wednesday, March 18th, 2020, President Trump signed into law the Families First Coronavirus Response Act (FFCRA). The FFCRA provides various legislative responses to the COVID-19 crisis and includes tax credits for both employers and the self-employed.
Employer Payroll Credit for Required Paid Sick Leave
The Payroll Credit for Required Paid Sick Leave provides a payroll tax credit equal to 100 percent of the wages paid by an employer under the Emergency Paid Sick Leave Act. The Emergency Paid Sick Leave Act requires employers with less than 500 employees to pay an employee the equivalent of two weeks’ pay for sick leave, if the employee’s leave is due the following COIVD-19 related issues:
1. Employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19.
2. Employee is advised to self-quarantine by a health care provider due to concerns related to COVID-19.
3. Employee is experiencing COVID-19 symptoms and seeking a medical diagnosis.
4. Employee is caring for an individual who is either subject to a Federal, State, or local quarantine or isolation order or has been advised to self-quarantine by a health care provider.
5. Employee is caring for a child whose school is closed or child care provider is unavailable.
6. Employee 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 Secretary of Labor.
The required paid sick time for a full-time employee is 80 hours and for a part time employee is “a number of hours equal to the number of hours that such employee works, on average, over a 2-week period.”
If the employer is required to pay an employee under reasons 1, 2, or 3 above, then paid sick time shall not exceed $511 per day or $5,110 in the aggregate. If the employer is required to pay an employee under reasons 4, 5, or 6 above, then the paid sick time shall not exceed $200 per day or $2,000 in the aggregate.
After the required sick leave is paid, the employer shall receive a tax credit equal to the amount required to be under the Emergency Paid Sick Leave Act. Stated differently, for employees paid under reasons 1, 2, or 3 above, the employer will receive a credit of $511 per day, and for employees paid under reason 4, 5, or 6 above, the employer will receive a $200 per day credit. The credit is claimed on the employer’s quarterly payroll tax return and must be first applied against the employer’s share of the payroll tax. Any credit amount over the employer’s share of the payroll tax for the quarter is fully refundable with the payroll tax return.
While regulations and other details have not been finalized, employers should document any sick leave that may qualify. This includes documenting an employee’s reason for sick leave and tracking all sick leave paid to an employee for said sick leave.
Payroll Credit for Required Paid Family Leave
Similarly, the Payroll Credit for Required Paid Family Leave provides a credit equal to 100 percent of qualified family leave wages paid by an employer. Qualified family leave wages are wages paid pursuant to the Emergency Family and Medical Leave Expansion Act, which was included in the FFCRA. Generally, the Emergency Family and Medical Leave Expansion Act requires certain employers to provide 10 days of unpaid leave and up to 10 days paid leave, subject to various restrictions. Specifically, this includes employers with “50 or more employees for each working day during each of 20 or more calendar work weeks in the current or preceding calendar year”. This paid leave shall not exceed $200 per day and $10,000 in the aggregate.
In turn, the employer will receive an equivalent payroll tax credit of $200 per day, not to exceed $10,000 in the aggregate. Again, similar to the Payroll Credit for Required Paid Sick Leave, this credit will be claimed on the employer’s quarterly payroll tax report and the credit amount must first be applied against the employer’s share of payroll taxes. Any credit in excess of the total payroll taxes is refundable to the employer.
Credits for Self-Employed Individuals
Congress provided an unprecedented sick leave benefit to self-employed individuals by passing both the Credit for Sick Leave for Certain Self-Employed Individuals and the Credit for Family Leave for Certain Self-Employed Individuals. These credits are intended to provide the self-employed individual with the same benefit that an employee would receive under either the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act.
The Credit for Sick Leave for Certain Self-Employed Individuals provides self-employed individuals a credit equal to 100 percent of the “qualified sick leave equivalent amount”. As this amount is partially based on the average daily self-employment income of an individual over the year, it is not determinable for most self-employed individuals at this time. Notwithstanding, the credit may not exceed $511 per qualifying day for individuals taking sick leave for COVID-19 reasons 1, 2, or 3, as discussed above, or $200 per qualifying day for individuals taking sick leave for COVID-19 reasons 4, 5 or 6. The number of days during the taxable year that the self-employed individual would be eligible for the emergency paid sick leave, had the person been an employee. The Credit for Sick Leave for Certain Self-Employed Individuals is fully refundable, presumably with the taxpayer’s 2020 income tax return.
The Credit for Family Leave for Certain Self-Employed Individuals is similar, providing a credit equal to 100 percent of the “qualified family leave equivalent amount” to the individual. This is again partially based on the average daily self-employment income of an individual over the year and not determinable at this time. The maximum credit a self-employed individual may receive is $200 times the number of qualifying days. Qualifying days for this purpose means the number of days that a self-employed individual would be eligible to receive paid leave under the Emergency Family and Medical Act, if the individual wee an employee. The Credit for Family Leave for Certain Self-Employed Individuals is also refundable, presumably with the taxpayer’s 2020 income tax return.
While these credits are generous, it is on the self-employed individual to document their qualification for each credit. Regulations will hopefully provide guidance on how to document, but self-employed individuals should document as best they can. At a minimum, this includes keeping a contemporaneous calendar listing the days an individual is unable to work and the reasoning for the leave. Additionally, self-employed individuals should retain any third-party documentation regarding the COVID-19 effects on their ability to work, including doctor’s notes, school closure listings, or quarantine orders.
As always, we will do our best to keep you updated on any further tax changes that may affect you. Please let us know if you have any questions.
Disclaimer: If you have any questions or concerns regarding your requirement to pay sick leave or family leave under this act, please consult with your employment attorney. Our explanations are merely to provide you with an understanding of the basics of this act for the calculation of the credit and should not be taken as legal advice.
