As most of our readers are aware by now, employers who are required to provide expanded Family and Medical Leave or Paid Sick Leave under the Families First Coronavirus Response Act are entitled to federal tax credits of 100 percent of the amounts paid to employees on qualified leaves.
The Internal Revenue Service has now issued guidance in the form of FAQs detailing how employers may apply for these credits, the documentation that must be retained, and other helpful information.
As we reported previously, employers will be allowed to withhold from their quarterly payroll tax deposits the amounts paid for qualifying leave. This includes the cost of health insurance and the employer’s share of the Medicare tax. If the amount withheld is not enough to cover the employer’s costs, then the employer may apply using IRS Form 941 for an accelerated refund of the balance, which the IRS says it will process and issue in two weeks or less.
The tax credit is available starting today, which is also the effective date of the Emergency Family and Medical Leave Expansion Act and the Emergency Paid Sick Leave Act provisions of the FFCRA. The emergency FMLA and the Paid Sick Leave Act will expire on December 31, and the tax credits will not be available for leave taken after that date.
We strongly recommend that employers who believe they may be eligible for these tax credits read through all of the FAQs and the links provided; however, here are some highlights (links are in the IRS publication):
17. May an Eligible Employer reduce its federal employment tax deposit by the qualified leave wages it has paid without incurring a failure to deposit penalty?
Yes. An Eligible Employer will not be subject to a penalty under section 6656 of the Internal Revenue Code for failing to deposit federal employment taxes relating to qualified leave wages (and allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) in a calendar quarter if:
the Eligible Employer paid qualified leave wages to its employees in the calendar quarter before the required deposit,
the amount of federal employment taxes that the Eligible Employer does not timely deposit is less than or equal to the amount of the Eligible Employer’s anticipated tax credits for these qualified leave wages (and allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) for the calendar quarter as of the time of the required deposit, and
the Eligible Employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.
For more information about the relief from the penalty for failure to deposit federal employment taxes on account of qualified leave wages, see Notice 2020-22 (PDF).
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31. Does the amount of qualified health plan expenses include both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the Employee?
The amount of qualified health plan expenses taken into account in determining the credits generally includes both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions. However, the qualified health plan expenses should not include amounts that the employee paid for with after-tax contributions.
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44. What information should an Eligible Employer receive from an employee and maintain to substantiate eligibility for the sick leave or family leave credits?
An Eligible Employer will substantiate eligibility for the sick leave or family leave credits if the employer receives a written request for such leave from the employee in which the employee provides:
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 support for such reason; and
A statement that the employee is unable to work, including by means of telework, for such reason.
In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.
In the case of a leave request based on a school closing or child care provider unavailability, the statement from the employee should include the name and age of the child (or children) 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 during the period for which the employee is receiving family medical leave and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.
45. What additional records should an Eligible Employer maintain to substantiate eligibility for the sick leave or family leave credit?
An Eligible Employer will substantiate eligibility for the sick leave or family leave credits if, in addition to the information set forth in FAQ 44 (“What information should an Eligible Employer receive from an employee and maintain to substantiate eligibility for the sick leave or family leave credits?”), the employer creates and maintains records that include the following information:
Documentation to show 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.
Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages. See FAQ 31 (“Determining the Amount of Allocable Qualified Health Plan Expenses”) for methods to compute this allocation.
Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19, that the employer submitted to the IRS.
Copies of the completed Forms 941, Employer’s Quarterly Federal Tax Return, that the employer submitted to the IRS (or, for employers that use third party payers to meet their employment tax obligations, records of information provided to the third party payer regarding the employer’s entitlement to the credit claimed on Form 941).
46. How long should an Eligible Employer maintain records to substantiate eligibility for the sick leave or family leave credit?
An Eligible Employer should keep all records of employment taxes for at least 4 years after the date the tax becomes due or is paid, whichever comes later. These should be available for IRS review.
Employee Retention Credit
The IRS also announced yesterday that a tax credit will be available to employers who retain employees during the coronavirus crisis. The credit is available to employers of any size, provided that they are not recipients of small business loans. State and local governments, and their instrumentalities, are not eligible for the credit.
Qualifying employers can receive a maximum credit of 50 percent of $10,000 in qualifying wages. An eligible employer will qualify if
The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, or
The employer's gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer's gross receipts go above 80 percent of a comparable quarter in 2019, they no longer qualify after the end of that quarter
(Quoted from IRS web page, with minor edits.)
The amount of “qualifying wages” is based on the size of the employer as of calendar year 2019. There is one formula for employers with fewer than 100 employees, and a different formula for employers with 100 or more employees.
As with the credits for expanded FMLA and paid sick leave under the FFCRA, the amount of the applicable Employee Retention Credit can be withheld from the employer’s quarterly payroll tax deposits or, if that is not enough to cover the credit, the employer can apply for a refund of the balance.
Employers who believe they may qualify for the Employee Retention Credit are advised to read the entire IRS publication on this subject, linked above.
For a printer-friendly copy, click here.