Tax Credits under the Families First Coronavirus Response Act

The Families First Coronavirus Response Act (the “FFCRA”) was signed into law on March 18, 2020. The FFCRA requires certain employers to provide employees with paid sick leave and family medical leave through December 31, 2020. To help cover the costs of providing this paid leave, the FFCRA also provides for a refundable payroll tax credit. The IRS and the Department of Labor issued News Release 2020-57 on March 20, 2020 addressing several issues under the FFCRA and issued subsequent guidance on March 27, 2020. Most recently, the COVID-related Tax Relief Act of 2020 (the “Act”), which was enacted on December 27, 2020, extended the payroll tax credit through March 31, 2021. In addition, the IRS updated its frequently asked questions relating to the FFCRA on January 28, 2021 to reflect changes made by the Act.

The FFCRA requires employers who employ fewer than 500 employees to provide paid sick leave and family medical leave (employers with fewer than 50 employees may be able to apply for a waiver from the Department of Labor). Information on how the number of employees is measured and how employers with fewer than 50 employees may apply for relief can be found in our client alert here. Employers may recover the costs of providing the benefits that are required by the FFCRA by claiming refundable payroll tax credits for qualified sick leave wages and qualified family leave wages paid for the period beginning on April 1, 2020, and ending on December 31, 2020. Similar self-employment tax credits are also provided for certain eligible self-employed individuals.

The Act did not extend the requirement under the FFCRA to provide paid sick leave and family medical leave. However, otherwise eligible employers who voluntarily continue to provide paid sick leave and family medical leave through March 31, 2021 may continue to recover the costs of providing these benefits through the payroll tax credit. The qualifying reasons for providing sick leave or family medical leave and the limit on qualified wages for purposes of claiming the tax credit were not changed.

Non-tax aspects of the FFCRA are discussed in our prior alert here. This client alert discusses the tax credits available to employers and self-employed individuals.

Payroll Credits for Qualified Sick Leave Wages and Qualified Family Leave Wages

Employers that provide paid sick leave or family medical leave to their employees generally must withhold income tax and the employee’s portion of Social Security and Medicare taxes from an employee’s wages. Employers must also pay the government the employer’s portion of Social Security and Medicare taxes, as well as federal unemployment (“FUTA”) taxes.

For the pay periods between April 1, 2020 and December 31, 2020, the FFCRA required employers with fewer than 500 employees to provide their employees who are affected by COVID-19 with (i) paid sick leave (“qualified sick leave wages”) or (ii) paid family medical leave for employees that have to miss work (and are unable to telework) to care for their minor child whose school or daycare is closed (“qualified family leave wages”). Employers were permitted to claim refundable payroll tax credits against their Social Security and Medicare tax liability for the qualified sick leave wages and qualified family leave wages equal to the amount of the qualified sick leave wages and family leave wages they paid for pay periods between April 1, 2020 and December 31, 2020. The Act allows employers that continue to provide paid sick leave and family medical leave between January 1, 2021 and March 31, 2021 to claim the payroll tax credit during this time period.

The amount of the employer’s qualified health plan expenses that are properly allocable to qualified sick leave wages or qualified family leave wages, as applicable, can increase the amount of the credits to the extent that such wages are excluded from the gross income of employees under Code Section 106(a).

The credits are subject to a number of limitations.

  • The sick leave credit per employee is limited to $511 per day for a maximum of 10 days if the employee is taking sick leave to care for themselves and $200 per day for a maximum of 10 days if the employee is taking sick leave to care for a family member or child when the child’s school or daycare is closed.
  • The qualified family leave wages per employee for which a credit may be claimed for a quarter cannot exceed $200 per day and $10,000 in the aggregate.
  • The U.S. government, state governments, or any political subdivision, agency or instrumentality thereof cannot claim either credit.
  • The credits cannot exceed the employer’s Social Security and Medicare tax liability for the quarter, but the employer may claim a refund under for amounts exceeding this limitation.

Employers claiming the credit must increase their gross income by the amount of the credit. Wages taken into account in calculating either payroll credit cannot be taken into account in calculating the credit for paid family and medical leave under Code 45S. Thus, employers that qualify for both the credit under Code Section 45S and the new credit under the FFCRA should consider which credit is more advantageous.

Credits for Certain Self-Employed Individuals

Equivalent credits are provided for self-employed individuals. Eligible self-employed individuals are allowed to claim (i) a refundable self-employment tax credit in an amount equal to 100% (reduced to 67% in certain cases) of their “qualified sick leave equivalent amount” (based on their sick days); and (ii) a credit against self-employment tax based on a qualified family leave equivalent amount (based on the days they cannot work because they must care for a sick family member or children). In each case, the “equivalent amount” must be reduced if the self-employed individual also works as an employee and receives wages paid by an employer for which the employer may claim credits under the FFCRA.

Guidance on Claiming the Credits

Notice 2020-21 provides that eligible employers may claim the credits for wages paid for the period beginning on April 1, 2020, and ending on December 31, 2020, which time period was extended by the Act to March 31, 2021 for eligible employers who continue to provide paid leave. Eligible employers who pay qualified sick leave wages or qualified family leave wages will be able to retain an amount of the payroll taxes up to the amount of such wages paid rather than deposit them with the IRS. The payroll taxes that employers can retain include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes. Notice 2020-22 provides that an employer will not be subject to the penalty under Code Section 6656 for failure to timely deposit the retained payroll taxes, provided the retained amount is less than or equal to the amount of the anticipated credit. If the retained payroll taxes are not sufficient to cover the cost of qualified sick and family leave paid, employers will be able to file Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. An employer cannot, however, seek an advance credit by filing Form 7200 with respect to the anticipated credits that were relied on to reduce its deposits.

For more information regarding the FFCRA, the Act or its impact on your business, please contact one of our employment or tax lawyers. IRS News Release 2020-57 and Notice 2020-21 are available here. The IRS frequently asked questions page addressing many issues under the FFCRA (and the changes in the Act) can be found here.

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