Families First Coronavirus Response Act Tax Benefits and Employer Obligations
Disclaimer: The following is not intended to constitute legal advice. Employers should consult a tax advisor on all tax matters and obtain employment law advice for all employee benefit obligations contained in the Act.
As the federal government searches for ways to combat the economic effects of the growing coronavirus (COVID-19) pandemic, the first official legislation towards those ends was the Families First Coronavirus Response Act (“the Act”), which was signed into law on March 18, 2020. The Act contains a variety of COVID-19-related provisions and mandatory paid leave benefits for employees, as well as associated employer tax benefits, which are intended to mitigate the costs of the paid leave time. The mandatory paid leave requirements will go into effect April 1, 2020, and are not effective retroactively.
The Act provides for multiple forms of economic relief for Americans, including required paid sick leave and an expansion of the Family and Medical Leave Act to include public health emergencies. Of particular interest to small business owners are the provisions concerning payroll and income tax credits associated with coronavirus-related paid leave.
Just this morning, the Department of Labor released guidance for employers concerning the mandatory sick and family leave provisions in the Act. Links to the Department of Labor guidance can be found at the end of this article.
The Act generally applies to all employers with fewer than 500 employees, although exemptions are possible for employers with fewer than 50 employees if payment of the leave benefits would jeopardize the viability of a business’s ability to continue as a going concern. Guidance from the Department of Labor is forthcoming in this regard.
The rights and duties created under the Families First Coronavirus Response Act are complex. Any business with fewer than 500 employees should be proactive about discussing the applicability of the Act to their business with qualified employment and tax law advisors.
The rules concerning public agencies are not addressed below, but such agencies are covered by the Act.
Emergency Paid Sick Leave
The Act requires employers with less than 500 employees to provide employees paid sick time to the extent an employee is unable to work (or telework) for any of the following six reasons:
- The employee is subject to 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 an order as described in (1) above or has been advised as described in (2) above.
- The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the childcare provider of such son or daughter is unavailable, due to COVID–19 precautions.
- The 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 the Secretary of Labor.
The Act provides the following rules for Paid Sick Leave:
- For full-time employees, the amount of paid sick leave is limited to 80 hours
- For part-time employees, the amount of paid sick leave is based on the hours a part-time worker works on average over a two-week period
- The rates of pay during this period are based on the following:
- For sick time related to reasons 1-3 above, the pay rate is the employee’s normal rate of pay per day, limited to $511 per day ($5,110 in aggregate)
- For sick time related to reasons 4-6 above, the pay rate is 2/3 of the employee’s normal rate of pay per day, limited to $200 per day ($2,000 in aggregate)
- There are separate calculations for how to determine paid sick leave for employees with varying hours
- This paid sick time is available for immediate use by the employee regardless of how long the employee has been employed by the employer
- The employer may not require an employee to use other paid leave provided by the employer before the paid sick leave allowed under this Act is used
- These sick leave wages are not subject to the employer portion of Social Security taxes
Paid Family Leave
The Act entitles employees to paid family leave under the following conditions:
- Up to 10 additional weeks of leave (in addition to the sick leave discussed above) due to the need to care for a son or daughter under 18 years of age if the school or place of care has been closed or if the child care provider is unavailable due to a public health emergency (reason 5 above)
- An eligible employee means an employee who has been employed for at least 30 calendar days by the employer
- The initial 10 days of the leave may be unpaid, although this is time that could be paid under the Emergency Paid Sick Leave provisions explained above. Employees may elect to use accrued paid vacation, personal, medical, or sick leave during these 10 days
- The amount of subsequent paid family leave is the lesser of:
- Two-thirds of the employee’s regular rate of pay multiplied by the number of hours the employee would otherwise be normally scheduled to work, or
- $200 per day, not to exceed $10,000 in the aggregate per employee
- There are alternative calculations for employees with varying work schedules
- These family leave wages are not subject to the employer Social Security taxes
Tax Credits for Paid Sick and Paid Family and Medical Leave
Employers are eligible for refundable employment tax credits for 100 percent of the family leave and sick leave paid under the Act. Similar credits against income taxes are granted to self-employed persons. The tax credits created in the Act can be summarized into the following types:
- Refundable credits reducing certain employer payroll taxes for sick leave paid to employees
- Refundable credits reducing certain employer payroll taxes for family leave paid to employees
- Refundable credits against income tax for sick leave for self-employed individuals
- Refundable credits against income tax for family leave for self-employed individuals
Credits Against Certain Employer Payroll Taxes for Sick Leave Paid to Employees
The Act allows for a tax credit against the employer’s share of quarterly Social Security taxes paid* equal to 100% of the qualified sick leave wages paid by that employer up to the limits described above. The credit is increased by the employee’s qualified health plan expenses, including group health plan expenses, during the leave period. Also, the credit is increased by the amount of employer-paid Medicare tax paid on the sick leave wages. Any excess of the credit beyond the reported payroll tax liabilities is refundable.
The allowable credit is different depending upon the reason for the employee’s absence. If the reason for the medical leave is related to reasons 1, 2, or 3 above, the allowable wage-portion of the credit is capped at $511 of wages per day per employee up to 10 total days. If the reason for the medical leave is related to reasons 4, 5, or 6 above, the allowable wage-portion of the credit is capped at $200 per day per employee.
Credits Against Certain Employer Payroll Taxes for Paid Family Leave Paid to Employees
If an employee needs to take expanded FMLA leave after the sick leave noted above, the Act establishes refundable payroll tax credits similar to the sick leave credits. The credit is based on 100% of the qualified family leave wages paid, but the wage-portion of the credit shall not exceed $200 per day of family leave pay, or $10,000 annually per employee. The credit is increased by the employee’s qualified health plan expenses, including group health plan expenses, during the leave period. Also, the credit is increased for the amount of employer-paid Medicare tax paid on the wages.
Credits Against Income Tax for Sick Leave for Self-Employed Individuals
A self-employed individual would be eligible for refundable credits against income tax liabilities if the taxpayer incurs sick time related to the aforementioned reasons if, notwithstanding his/her ownership, he/she would be considered an employee in the applicable business and the self-employed individual regularly carries on a trade or business. The credit amount is equal to the lesser of the same daily calculation allowed for employees noted above, or either 67% (if the sick time is related to reasons 4, 5, 6) or 100% (if the sick time is related to reasons 1, 2, or 3) of daily self-employment income for the days missed, up to 10 total days. Average daily self-employment income is the net earnings from self-employment of the individual for the taxable year divided by 260 days. There are certain limitations on self-employed individuals who also receive paid sick leave as an employee because of the Emergency Paid Sick Leave Act.
Credits Against Income Tax for Family Medical Leave for Self-Employed Individuals
A self-employed individual would be eligible for refundable credits against income tax liabilities if the taxpayer needs to take leave time related to the aforementioned reasons if, notwithstanding his/her ownership, he/she would be considered an employee in the applicable business and the self-employed individual regularly carries on any trade or business. The credit amount is determined by the number of days (not to exceed 50) during the taxable year that the individual is unable to perform services multiplied by the lesser of 67% of the average daily self-employment income of the individual for the taxable year or $200. Average daily self-employment income is the net earnings from self-employment of the individual for the taxable year divided by 260 days.
Authored by Nick Prelog, CPA, Shareholder
Department of Labor guidance concerning mandatory paid leave:
*The Act calls for a credit against taxes imposed by section 3111(a) or 3221(a) of the Internal Revenue Code of 1986 for each calendar quarter. IRS Press Release IR-2020-57 expands the ability of the employer to offset payroll deposits for not just Social Security taxes but also Medicare tax and withholdings. Further guidance from the IRS is expected in the near term.