Answers to Ten FAQs
Recent legislation extended and amended tax relief to certain small- and mid-sized employers under the Families First Coronavirus Response Act (FFCRA). The Tax Relief Act of 2020 enacted on December 27, 2020, extends the availability of the tax credits created by the FFCRA to eligible employers for paid sick and family leave provided through March 31, 2021, as well as other amendments to the credits.
The paid sick leave credit is designed to allow qualified businesses to get credit for wages or compensation paid to an employee who is unable to work (including telework) because of coronavirus quarantine or self-quarantine or has coronavirus symptoms and is seeking a medical diagnosis.
- A “qualified business” has fewer than 500 employees and pays “qualified sick leave wages.”
1. What tax credits does the FFCRA provide?
The FFCRA provides businesses with tax credits to cover certain costs of providing employees with paid sick leave and expanded family and medical leave for reasons related to COVID-19, for periods of leave from April 1, 2020, through March 31, 2021.
Note: The COVID-related Tax Relief Act of 2020 extends the tax credits available to eligible employers for paid sick and family leave provided under the Emergency Paid Sick Leave Act (EPSLA) or Expanded FMLA through March 31, 2021. Therefore, any references to these credits expiring on December 31, 2020, have been updated to March 31, 2021.
Eligible employers may claim credit for paid sick leave provided to an employee for up to two weeks (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.
In addition, an eligible employer can receive the paid sick leave credit for employees who are unable to work due to caring for someone with coronavirus, or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the coronavirus. Eligible employers may claim the credit for paid sick leave provided to an employee for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay, or up to $200 per day and $2,000 in total.
Employers are also entitled to a paid family leave credit for paid family leave provided to an employee equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.
2. When can employers start claiming the credits?
Eligible employers may claim tax credits for qualified leave wages paid to employees on leave due to paid sick leave or expanded family and medical leave for reasons related to COVID-19 taken for periods of leave beginning on April 1, 2020, and ending on March 31, 2021.
Eligible employers may claim the credits on their federal employment tax returns (e.g., Form 941, Employer’s Quarterly Federal Tax Return) but they can benefit more quickly from the credits by reducing their federal employment tax deposits. If there are insufficient federal employment taxes to cover the amount of the credits, an eligible employer may request an advance payment of the credits from the IRS by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19.
3. When will employers start to receive the credits?
After qualified leave wage payments are made, eligible employers may receive payment of the credits per applicable IRS procedures (see “How do Eligible Employers claim the credit?” on IRS.gov).
Eligible employers are entitled to immediately receive a credit in the full amount of the paid sick leave and family leave plus related health plan expenses and the employer’s share of Medicare tax on the leave provided through March 31, 2021. The refundable credit is applied against certain employment taxes on wages paid to all employees.
4. What documentation must an eligible employer retain to substantiate eligibility to claim the tax credits?
Eligible employers claiming the credits for qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare tax), must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for the credits and retain the Forms 941, Employer’s Quarterly Federal Tax Return, and 7200, Advance of Employer Credits Due To COVID-19, and any other applicable filings made to the IRS requesting the credit.
5. What employers may claim the tax credits?
Eligible employers that are entitled to claim the refundable tax credits are businesses and tax-exempt organizations that: (1) have fewer than 500 employees, and (2) pay “qualified sick leave wages” and/or “qualified family leave wages” under the EPSLA and/or the Expanded FMLA, respectively.
Note that the Federal government, the governments of any state or political subdivision thereof, and any agencies or instrumentalities of those governments are not eligible employers and are not entitled to receive tax credits for providing paid leave wages under the FFCRA. Tribal governments that provide paid sick and paid family and medical leave according to the FFCRA are eligible to claim the tax credits for qualified leave wages, assuming they are otherwise eligible employers.
6. What is the amount of the refundable tax credits available to Eligible Employers?
The credits cover 100 percent of up to two weeks (up to 80 hours) of the qualified sick leave wages and up to ten weeks of the qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an eligible employer paid during a calendar quarter, plus the amount of the eligible employer’s share of Medicare tax imposed on those wages. Qualified sick leave and qualified family leave under the EPSLA and the Expanded FMLA, respectively, are in addition to employees’ preexisting leave entitlements.
- See the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers for rules regarding the FFCRA paid sick leave and expanded family and medical leave and other leave entitlements. Eligible employers may only claim a credit for qualified leave wages.
Example: An eligible employer pays $10,000 in qualified sick leave wages and qualified family leave wages in Q2 2020. It does not owe the employer’s share of social security tax on the $10,000, but it will owe $145 for the employer’s share of Medicare tax. Its credits equal $10,145, which include the $10,000 in qualified leave wages plus $145 for the eligible employer’s share of Medicare tax (this example does not include any qualified health plan expenses allocable to the qualified leave wages). This amount may be applied against any federal employment taxes the eligible employer is liable for on any wages paid in Q2 2020. Any excess over the federal employment tax liabilities is refunded in accordance with normal procedures. The eligible employer must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid, except to the extent the employer opts to defer the withholding and payment of the employee’s share of social security tax under IRS guidelines.
7. What are “qualified sick leave wages”?
Qualified sick leave wages are wages an employer pays under the EPSLA to an employee who is unable to work or telework because of either the employee’s health status (that is, the employee is under COVID-19 quarantine or self-quarantine or has COVID-19 symptoms and is seeking a medical diagnosis) or the employee’s need to care for others (that is, the employee is caring for someone with COVID-19 or a child whose school or place of care is closed or child care provider is unavailable).
8. What are “qualified family leave wages”?
Qualified family leave wages are wages an employer pays under the Expanded FMLA to an employee who is unable to work or telework because the employee is caring for a child whose school or place of care is closed or child care provider is unavailable for reasons related to COVID-19.
9. Do qualified leave wages include wages paid to an employee who must care for a child because the child’s summer camp is closed?
Yes. Wages or compensation paid to an employee are qualified leave wages if the employee is unable to work or telework due to a need to care for his or her child whose place of care is closed for reasons related to COVID-19. An employee would satisfy these criteria if he or she cannot work or telework to care for a child due to the closure of a summer camp, summer enrichment program, or other summer programs for reasons related to COVID-19.
10. What are “qualified health plan expenses”?
Qualified health plan expenses are amounts paid or incurred by an eligible employer to provide and maintain a group health plan that are allocable to the employee’s qualified leave wages.
A Final Note
Contact your local tax professional if all of this seems a bit overwhelming.
Stay safe. Stay well. Stay home.
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