On March 20, 2020 the U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (DOL) announced that small and midsize employers would soon be able to take advantage of two new refundable payroll tax credits. Both credits are designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees. The credits can be used against both Federal Insurance Contributions Act and Railroad Retirement Tax Act employer taxes. However, to turn a phrase, the devil is in the governing details.
The relief for small and midsize businesses is provided under the Families First Coronavirus Response Act (FFCRA or the Act), signed by President Trump on March 18, 2020. The Act is intended to help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide their employees with paid leave (either for the employee's own health needs or to care for family members). The intent of the legislation is to enable employers to keep their employees on their payrolls, while at the same time ensuring that employees are not forced to choose between their paychecks and the public health measures needed to combat the virus.
For small and mid-size businesses concerned with managing cash-flow and keeping their business alive, will these new tax credit provisions provide significant cash-flow relief, is a large question? The answer is no different from what many attorneys and accountants initially provide when responding and that is “it depends”. A calculation of the potential benefits will likely require coordination between senior business management, its employment law attorneys, its certified public accountants, and its payroll departments and/or payroll processors to determine the amount of, and to claim, the benefit. The results are very dependent upon each businesses’ unique set of facts and circumstances; the benefits may, or may not, provide the level of assistance that high level talking points by the government and others imply.
The Act mandates paid sick leave and expanded family and medical paid leave for COVID-19 related reasons on small and mid-size businesses that may not have previously offered, or have been required to offer, these benefits. To help offset the cost of these requirements, the Act creates a refundable paid sick leave credit and a paid child care leave credit for employers with eligible employees. It’s important to understand that not all compensation related payments to employees will generate credits. Only those payments fitting within the parameters of the requirements will generate a credit.
Employers subject to the provisions include both for-profit businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. It is generally viewed by most advisors that the effective date for implantation of the Act’s requirements is likely to be April 2, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.
Small businesses with fewer than 50 employees may qualify 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. The DOL is to provide exemptions based on simple and clear criteria as to the businesses who might qualify for this exemption. As of the date of this article, that guidance is not yet available.
Paid Sick Leave and Sick Leave Credit
The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee's pay. The statute requires sick pay to be paid by an employer under this Act when an employee is unable to work (or telework) due to a need for leave because the employee:
Is subject to federal, state, or local quarantine or an isolation order related to COVID-19.
Has been advised to self-quarantine by a healthcare provider.
Is experiencing symptoms & is seeking medical diagnosis.
Is caring for an individual subject to quarantine pursuant to items 1 or 2 above.
Is caring for children whose school or daycare provider is unavailable due to COVID-19.
Is experiencing a similar condition specified by HHS, DOL, or Treasury
The required salary and wage replacement under this portion of the Act is generally:
By reasons of items 1 – 3 above - The employees regular rate of pay but capped at $511/day and $5,110 in total.
By reasons of items 4 – 6 above - 2/3 of employee’s regular rate of pay but capped at $200/day and $2,000 total.
Special calculation rules apply to part-time employees
In general, the credit generated on the payment of the above items is equal to the total amount of sick pay salary or wages paid to the specific eligible employee under the FFCRA, plus the proportionate cost of group health insurance coverage (to the extent excluded from the employee’s pay) paid for by the employer on behalf of that specific employee under the FFCRA. The credit earned above can offset the total share of employer taxes on all employees.
Paid FMLA Child Care Leave and Child Care Leave Credit
In addition to emergency sick leave, an employee unable to work due to a need to care for a child whose school is closed, or when a child care provider is unavailable, for reasons related to COVID-19 may in some instances receive up to an additional ten weeks of expanded paid family and medical leave. This provision applies when an employee is unable to work (or telework) due to a need for leave to care for a son or daughter under 18 years of age. Paid leave under this provision begins after the employee has been off for 10 days and can be coordinated with the sick pay leave, which pays up to 10 days.
The statute requires the employer to pay the eligible employee at 2/3 the employee's pay but capped at $200/day with a maximum of $10,000 paid to any one employee.
In general, the credit generated on the payment of the above items is equal to the total amount of emergency family and medical salary or wages paid to the specific eligible employee under the FFCRA, plus the proportionate cost of group health insurance coverage (to the extent excluded from the employee’s pay) paid for by the employer on behalf of the specific employee under the FFCRA. The credit earned above can offset the total share of employer taxes on all employees.
The payroll taxes that are available for credit retention appear to include 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.
If there are insufficient employer payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS announced that it expects to process these requests in two weeks or less.
Further, a draft bill in the Senate, the “CARES ACT” (Section 4607 Advance Refunding of Credits) currently being negotiated between the political parties would provide that penalties could be waived if it is determined that an underpayment was caused in anticipation of the credit being allowed. Presumably, this means an employer made a good faith effort to calculate the credit properly allowed against the payroll tax deposit required.
There are no examples provided for in a Joint Committee on Taxation’s explanation of the law issued on March 17, 2020. Additionally, there is only a very simplistic example provided on the IRS website.
In our simple example, we assumed an employer has only 10 employees (assuming the employer does not qualify for the under 25 employee exemption) and is paying its employees $10,000 per month each before consideration of any emergency leave. After the effective date the rules are implemented, one employee was out sick for two weeks due to advice from a healthcare professional to self-quarantine and then she returned to work afterwards. A second employee qualified for emergency family leave as he was unable to work (or telework) because of the coronavirus public health emergency and because he had his two elementary age school children at home; he was on leave for 3 months. The remaining eight employees continued to work during the period. Using these basic facts, it was determined that the employer would generate tax credits of $7,700 in the first month, and $4,400 for the second and third months.
However, there are multiple variations on the above set of assumptions that would change the results. The credit result is highly dependent upon each set of unique facts and circumstances.
In addition, regulations are forthcoming that will provide additional clarification that should include a definition on the determination of the employer’s taxable wages for FICA purposes.
Tax Credit Administration and General Compliance
The portion of the law pertaining to the availability of tax credits does not contain specific information on documenting positions on determining which employees are eligible for tax credits. Prudent business practice would suggest the business contemporaneously document the eligible employees, the times employees are absent and being paid leave, the qualifying reason for the payment, and their need to comply with federal, state, or local quarantine requirements.
Employers should consult with their employment attorneys regarding employment requirements. Violations of the law are subject to penalties under the federal fair labor rules.
As businesses are considering their options, they should:
Gather employee data and determine if there are any employees eligible for exclusion from the requirements (30 day employment period not met for example);
Determine whether individual employees’ being provided paid leave qualify under the requirements provided in the Act;
Determine rates of compensation and periods of payment during the leave;
Project the economic impact of the savings generated by the credit program.
It is understood that these times are unprecedented for most of us in our lifetime; we are living in history. In addition to our healthcare providers, governing bodies are strained. The law is quickly written, approved by Congress, and signed into law. The IRS, businesses, and advisors are interpreting these provisions quickly and the conclusions, when they are showing up in print, sometimes appear to be conflicting with other conclusions and interpretations. Congress has made errors in the past in quickly drafting bills as witnessed in the Tax Cuts and Jobs Act. There may be inadequately drafted language in some of the bills that are quickly being enacted, with good intent, to help America. Good intent won’t ease the minds of business owners needing to make quick decisions based upon the law’s requirements. They need to make decisions quickly, often with imprecise facts and information. We continue to urge you to proceed carefully and thoughtfully after obtaining the best information possible under these circumstances.
In the coming days, it is expected that Congress will deliver to the President another bill that will change the federal income tax laws again, including some of the provisions enacted as part of the Tax Cuts and Jobs Act. Schneider Downs remains at the ready to help address all your needs and concerns during these challenging times. We’ll continue to analyze the new law and will provide additional updates as information becomes available.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.