This post was contributed by Timothy Finnerty, Co-Chair of the McNees Corporate & Tax Group
As the coronavirus spread throughout the US and many businesses closed their doors, Congress passed the Families First Coronavirus Response Act (the “Act”). President Trump signed the Act on Wednesday, March 18. The legislation provides benefits to employees that are affected by the virus (both directly and indirectly).
Specifically, the Emergency Family and Medical Leave Expansion Act and the Emergency Paid Sick Leave Act, which are both part of the Act, provide employees of small employers (less than 500 employees) with paid leave if they are impacted by the virus. Our Labor and Employment Group has provided a detailed summary of qualifications, limitations and amounts of these benefits here.
In order to reduce the stress that payment of these benefits will cause to a small employer’s cash flow, the Act includes two tax credits, both of which are in the form of payroll tax credits. The credits are structured to fund the benefits that are required to be paid to employees under the Act for Emergency Paid Sick Leave and Paid Family Leave. However, employers will be required to make the payments to employees and then recoup such amounts through the mechanism of the two credits in the Act. Some of the details are still being worked out as Congress works to finalize additional legislation, which could impact some of these provisions.
Tax Credit for Required Paid Sick Leave
The payroll tax credit for Required Paid Sick Leave provides employers with a tax credit against the social security tax it is required to pay to the IRS, equal to 100% of the “qualified sick leave wages” paid by the employer with respect to a calendar quarter. The amount of the qualified sick leave wages will depend upon the exact reason for the payment to the employee, but in all cases, it will not exceed $511 per day, per employee. The maximum amount of wages, therefore, would be $5,110 per employee.
The tax credit is also increased by a pro-rata portion of the employer’s qualified health plan expenses. The exact amount of this ‘portion’ is difficult to determine based on the language in the Act. However, the Act provides that further regulations will be prescribed to establish how these amounts will be determined. Additional guidance will likely be finalized very soon.
Importantly, this credit is refundable to the employer. As such, if the amount of the tax credit exceeds the amount owed by the employer to the IRS, that amount will be treated as an overpayment and refundable to the employer. We expect that the IRS will release additional information this week on how those refunds will be processed. The normal process would be through the employer’s quarterly payroll return (Form 941), but a quicker process is likely being vetted by the IRS.
Tax Credit for Required Paid Family Leave
The other payroll tax credit tax in the Act is the Payroll Credit for Required Paid Family Leave. This tax credit also provides employers with a credit against the social security tax it is required to pay to the IRS, equal to the 100% of the “qualified family leave wages” paid by the employer to an employee. The amount of the tax credit is capped at $200 per day and $10,000 in the aggregate, per employee, but is otherwise calculated as two-thirds of the employee’s regular pay.
Like the Tax Credit for Required Paid Sick Leave, the Tax Credit for Required Paid Family Leave is also increased by a pro-rata portion of the employer’s qualified health plan expenses. Additional guidance from the IRS is expected to provide more clarity on how that amount should be calculated.
This tax credit is likewise refundable to the employer. The details on how those refunds will work will be forthcoming. However, we are expecting that whatever the IRS puts in place will provide the employer with quick access to the much-needed cash. As Congress debates additional relief for everyone affected by the virus, we will keep you updated on issues impacting your business.