By Demetrius Robinson & Melissa Yasinow
As we’ve previously discussed, the month-old Families First Coronavirus Response Act (FFCRA) includes two mandatory paid leave provisions: the Emergency Paid Sick Leave Act (the “Sick Leave Act”) and the Emergency Family and Medical Leave Expansion Act (“Expanded FMLA”). These provisions apply to businesses with fewer than 500 employees, with exemptions available for certain employers. To help employers shoulder these sudden expenses, which the IRS calls “qualified leave wages,” employers may claim a tax credit to offset this expense.
The IRS has issued 66 new FAQs to help employers understand the FFCRA’s tax implications, and more guidance is soon expected. To help employers make sense of this flood of information, we’ve compiled some helpful information for businesses to justify and claim these essential tax credits.
What Qualified Leave Wages Must Be Paid?
Under the Sick Leave Act, employers must pay sick leave if the employee is unable to work (including telework) for any of the following six (6) reasons:
- The employee is under a Federal, State or local quarantine or isolation order related to COVID‑19;
- The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
- The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
- The employee is caring for an individual who is subject to a Federal, State or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
- The employee is caring for the child of such employee if the school or place of care of the child has been closed, or the child care provider of such child is unavailable, due to COVID–19 precautions;
- The employee is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services.
If an employee is unable to work for reasons (1), (2) or (3), then the employee is entitled to paid sick leave for up to 80 hours at 100% their rate of pay, up to $511 per day and $5,110 in the aggregate.
If an employee is unable to work for reasons (4), (5) or (6), then the employee is entitled to paid sick leave for up to 80 hours at 2/3 their rate of pay, up to $200 per day and $2,000 in the aggregate.
In addition to paying employees under the Sick Leave Act, employers must also provide up to 10 weeks of paid, and 2 weeks unpaid, emergency family and medical leave under the Expanded FMLA. The Expanded FMLA pay, however, must be provided only if the employee cannot work because they are caring for a child whose school or daycare is closed, or whose care provider is unavailable to serve because of COVID-19 (i.e. Reason (5) listed above). The Expanded FMLA pay is at 2/3 the employee’s rate of pay, up to $200 per day and $10,000 in the aggregate.
What Tax Credits Am I Entitled to and How Do I Claim Them?
Employers are entitled to a 100% tax credit for the full amount paid between April 1, 2020, and Dec. 31, 2020, for: (i) qualified leave wages, (ii) plus allocable qualified health plan expenses (i.e. the cost of maintaining health insurance for the employee during the sick or family leave period), and (iii) plus the employer’s share of the Medicare tax imposed on the qualified leave wages.
Although employers will claim the credits on their quarterly federal employment tax returns (ex: Form 941, Employer’s Quarterly Federal Tax Return), they can more quickly benefit by reducing their federal employment tax deposits and using those amounts to fund these new, mandatory expenses.
Employers can retain the federal employment taxes they otherwise would have deposited, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare taxes with respect to all employees. If an employer does not have enough federal employment taxes set aside for deposit to cover its FFCRA obligations, then the employer may request an advance of the credit from the IRS by completing Form 7200, Advance Payment of Employer Credits Due to COVID-19. If the amount of the credits exceeds the employer’s share of the social security tax, then the excess is treated as an overpayment and refunded to the employer.
Can You Give Me Some Examples?
Sure.
Example 1: An employer pays $10,000 in qualified leave wages and allocable qualified leave wages in Q3 2020. The employer does not owe its share of social security tax on the $10,000, but does owe $145 for its share of the Medicare tax. The total credit amount is $10,145, and may be applied against any federal employment taxes that the employer is liable for in Q3 2020. The employer still must withhold the employee’s share of social security and Medicare taxes on the paid qualified leave wages.
Example 2: An employer paid $5,000 in qualified leave wages, along with allocable health plan expenses and the employer’s share of Medicare tax in Q2 2020. The employer is otherwise required to deposit $8,000 in federal employment taxes, including the taxes withheld from all employees, for wage payments made during that same quarter. The employer may keep, without penalty, up to $5,000 of the $8,000 it was going to deposit and must deposit only $3,000 on its required deposit date.
Example 3: An employer paid $10,000 in qualified leave wages, along with allocable health plan expenses and the employer’s share of Medicare tax in Q4 2020. The employer is otherwise required to deposit only $8,000 in federal employment taxes, including the taxes withheld from all employees, for wage payments made during that same quarter. The employer can keep, without penalty, the entire $8,000 that it would have otherwise had to deposit a portion of the credits it is entitled to claim on Form 941. The employer may also file a request for an advance credit for the remaining $2,000.
What Documentation Do I Need to Justify My Credits?
Employers must obtain documentation from their employees, and create and maintain specific records, to substantiate their eligibility for the FFCRA tax credits. Employers should keep these records for at least four (4) years after the tax becomes due or is paid, whichever is later.
Documentation from Employees
Employers can substantiate their sick leave and family leave credits if they receive a written leave request from an employee that contains the following information:
- The employee’s name;
- The date or dates for which leave is requested;
- A statement of the COVID-19 related reason the employee is requesting leave and written report for such reason; and
- A statement that the employee is unable to work, including through telework, for such reason.
If an employee is requesting leave based on a quarantine order or self-quarantine advice, then the employee’s statement (#3 above) should include the name of the governmental entity ordering quarantine or the name of the healthcare professional advising self-quarantine. If the person subject to quarantine or advised to self-quarantine is not the employee, then the employee should provide that person’s name and their relationship to the employee.
If an employee is requesting leave based on a school closing or childcare provider unavailability, then the employee’s statement (#3 above) should include the name and age of their sons/daughters to be cared for, the name of the school that has closed or place of care that is unavailable, and a representation that no other person will be providing care for the child/children during the period for which the employee is receiving family medical leave. With respect to an employee’s inability to work or telework because of a need to care for a son or daughter, older than 14, during daylight hours, the employee must also include a statement that special circumstances exist requiring the employee to provide care.
We strongly recommend that employers incorporate the above-required information into their leave request forms. It should also be included in written notices to employees about their obligations to notify employers of their need for leave and to submit supporting documentation before taking leave.
Documents to Be Created by Employers:
To substantiate their sick and family leave credits, employers should not only have the above documentation from employees, but they should also create and maintain the following documents:
- Documents showing how the employer determined the amount of qualified sick and family leave wages paid to employees that are eligible for the credit, including records of work, telework and qualified sick leave and qualified family leave.
- Documents showing how the employer determined the amount of qualified health plan expenses that the employer allocated to wages.
- Copies of any completed Forms 7200 that were submitted to the IRS.
- Copies of the completed Forms 941 that were submitted to the IRS. Alternatively, for employers who use third-party payers, records of information provided to that third-party payer regarding the employer’s entitled to the credit claimed on Form 941.
Although this is not an easy subject, it is vital for businesses to understand their rights and obligations under the Families First Coronavirus Response Act. If you have any questions about how the FFCRA impacts your tax credits or liabilities, or you would like any forms to help you collect the necessary information from your employees, please contact Demetrius Robinson (djr@kjk.com or 614.427.5749), Melissa Yasinow (may@kjk.com or 216.736.7205), or any of our Tax professionals.