Filed under: Family Business Consulting, Private Business, Tax Compliance & Planning
This article was updated on March 31, 2020 with new information on the CARES Act.
On Wednesday March 18, 2020, President Trump signed the Families First Coronavirus Response Act.
Although media coverage of the Act understandably focuses on the paid sick leave and expanded family and medical leave aspects of the legislation, the Act also contains tax credits to help employers offset the cost of the newly mandated paid leave coverage for their employees.
Sick Leave and Family Leave
The Act requires employers with fewer than 500 employees to pay for up to 10 workdays (80 hours for full-time employees) of qualified family leave or sick leave at the employees’ full salary. However, there is a cap of $511 per day and $5,110 total for personal sick leave and $200 per day and $2,000 total to care for another person. Employers with fewer than 50 employees can seek exemption from this coverage.
In addition, the Act provides for mandated extended paid family medical leave coverage. The required leave payments kick in after an optional 10-day unpaid leave period, during which the employee can elect to use accrued vacation or sick days. The extended paid leave is capped at the lower of two-thirds of the employee’s regular pay rate or $200 per day and $10,000 in the aggregate per employee.
Tax Credits
To help employers pay for the mandated leave, the Act provides for an employer payroll tax credit of 100% of the qualified paid leave against the employer’s Social Security or Railroad Retirement payroll tax and also against withheld employee payroll taxes, including withheld Federal income tax.
This credit applies to eligible wages paid starting 15 days after enactment of the Act (April 2, 2020) and through December 31, 2020. The credit is capped at the daily mandatory payment caps discussed above: $511/$200 per day; $5,110 or $2,000/$10,000 aggregate.
Credits are also capped at the amount of the employer’s payroll tax liabilities (see below) but reduced for any credits claimed for employment of qualified veterans or qualified small business research expenditures. Excess credit, if any, is then treated as a refundable credit against income or payroll taxes. Please see below for how to claim the credit. Claiming the credit is optional.
To prevent “double dipping” by impacted employers, the Act requires that the employer’s income be increased by the amount of the credit claimed to offset what would otherwise be a tax deduction for payroll taxes later credited back to the employer.
For self-employed persons, the Act provides for a refundable credit against self-employment taxes for “qualified sick leave equivalent amounts.” The credit is limited to the lesser of $200 per day ($511 for sick leave) if the self-employed person is unable to work or 67% of their average self-employment income (net earnings from self-employment divided by 260). To prevent a double benefit for self-employed persons, their “sick leave equivalent” amounts are reduced to the extent they also receive payments from an employer under either the sick leave or paid family leave requirements of the Act but limited to either $2,000 for family leave or $5,110 for sick leave.
The credit allowed is increased by the employer’s qualified health plan expenses that are “allocable” to the qualified sick leave wages for which the credit is allowed. Allocation of the expenses that is pro rata among covered employees or pro rata based on periods of coverage are considered “properly made.”
Employers Will Retain Employer Payroll Tax and Employee Withholdings to Fund Leave Payments
Although the Act provides for tax credits for employers paying the new leave benefits, employers will be required to pay the benefits up front, except employers that qualify for exemption, with credit for the payments against future payroll tax obligations.
The IRS released guidance on Friday March 20, 2020 that states the employer will be able to retain withheld employee Federal income tax, Social Security tax, and Medicare tax to cover the cost of qualifying leave payments. In addition, the employer will retain its portions of Social Security and Medicare taxes. If the payroll taxes are not sufficient to cover the cost of the qualified leave payments the employer will be able to file a request for an accelerated payment from the IRS. The IRS is promising to process the requests promptly.
CARES Act
President Trump signed the CARES Act into law on Friday March 27, 2020. Included in the $2.2 trillion financial stabilization bill are the following:
- Employee retention credits,
- Tax rebates for certain individuals,
- Penalty free access to retirement account dollars,
- Restoration of net operating loss carryback claims,
- Delay of payroll tax payments until December 31, 2021 and 2022,
- Small Business Administration “Paycheck Protection Program” Loans.
The CARES Act is the third economic recovery bill passed by Congress so far to deal with the fallout of coronavirus, social distancing, and business disruption. Congress is now working on a fourth bill that will address economic stimulus versus economic stabilization as in the CARES Act. In other words, Congress is just getting started on providing relief for businesses and individuals impacted by the coronavirus. More help is on the way.
If you have any questions about the mandated leave costs and related tax credits, please contact your Clark Nuber representative.
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