You are here

Tax Credits to Recover Costs of Providing COVID-19 Leave

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (the “Act”), which provides small and medium-sized businesses supplemental appropriations related to the COVID-19 public health emergency, as well as waivers and modifications of federal nutrition programs, employment-related protections and benefits, health programs and insurance coverage requirements, and related employer tax credits and tax exemptions.

The Act provides for two paid leaves that employers with less than 500 employees must provide in response to the COVID-19 pandemic. The two sources of paid leave are Emergency Paid Sick Leave and Emergency Family and Medical Leave. These provisions take effect within 15 days of the signing of the Act and expire on December 31, 2020.

Emergency Paid Sick Leave must be provided to all employees regardless of how long the individual has been employed by the employer. Emergency Family and Medical Leave payments must be provided to any individuals who have been employed by the employer for at least 30 calendar days.

As part of this legislation, small and midsize employers (i.e. employers with less than 500 employees) are allowed two new refundable payroll tax credits, designed to reimburse them for the cost of providing COVID-19 related leave to their employees.

Emergency Paid Sick Leave

The Act provides that employees can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee:

  • Is subject to a federal, state, or local quarantine or isolation order related to COVID-19
  • Has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
  • Is experiencing symptoms of COVID-19 and seeking a medical diagnosis

Full-time employees unable to work due to the reasons noted immediately above are entitled to 80 hours of paid sick leave at 100% of the employee’s regular rate of pay (or the federal, state, or local minimum wage, whichever is greater), not to exceed $511 per day/$5,110 in the aggregate.

In addition, an employee who is unable to work can receive two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s pay because of the following:

  • A need to care for an individual subject to a quarantine/isolation order, advised to self-quarantine by a health care provider, or experiencing symptoms while seeking a medical diagnosis
  • A need to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19
  • The employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services (www.hhs.gov)

Full-time employees unable to work due to all the reasons noted immediately above are entitled to 80 hours of paid sick leave at not less than two-thirds of the employee’s regular rate of pay, not to exceed $200 per day/$2,000 in the aggregate. 

Part-time employees are entitled to a number of hours equal to the number of hours that the employee works, on average, over a two-week period.

Employers who are health care providers or emergency responders may elect to exclude employees from this leave provision.

Emergency Family and Medical Leave

In addition to the Emergency Paid Sick leave, for an employee who is unable to work, or telework, because of a need to care for a child under 18 years of age whose school or child care facility is closed or whose child care provider is unavailable due to COVID-19, the employee may take up to 12 weeks of job-protected leave.

The first 10 days of the leave may be unpaid, but employees may use other paid leaves (e.g. accrued vacation leave, etc.) during this time. After 10 days of unpaid leave, the employee must be paid at no less than two-thirds of the employee’s regular rate of pay up to $200 per day/$10,000 in the aggregate.

Employers who are health care providers or emergency responders may elect to exclude employees from this leave provision.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the Emergency Family and Medical Leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue.

Tax Credits for Emergency Paid Sick Leave and Emergency Family and Medical Leave

The Act provides employers refundable tax credits to offset costs associated with the Emergency Paid Sick Leave and Emergency Family and Medical Leave provisions of the Act. The Act provides a refundable tax credit against the employer portion of Social Security payroll taxes for each calendar quarter equal to 100% of the “qualified” sick leave wages and “qualified” family leave wages paid by an employer.

The below provides an overview of the available credits:

1.Emergency Paid Sick Leave – the amount of qualified sick leave wages taken into account for the payroll credit (at the employee’s regular rate of pay) is capped at (i) $511 per day while the employee is receiving paid sick leave to care for themselves, or (ii) $200 if the sick leave is to care for a family member or child whose school or childcare provider is closed. An additional limit applies to the number of days per employee—the aggregate number of days taken into account for an employee equals the excess of 10 days over the aggregate number of days taken into account for all preceding calendar quarters.

2.Emergency Family and Medical Leave – the amount of payroll credit for the required paid family leave cannot exceed two-thirds of the employee’s regular pay, capped at $200 per day ($10,000 for all calendar quarters).

3.Qualified Health Plan Expenses – the amount of the credits are increased by the portion of the employer's "qualified health plan expenses" that are properly allocable to qualified sick leave wages or qualified family and medical leave wages. Qualified health plan expenses means amounts paid or incurred by the employer to provide and maintain a group health plan—as defined in Internal Revenue Code Sec. 5000(b)(1)—but only to the extent that such amounts are excluded from the gross income of employees by reason of Internal Revenue Code Sec. 106(a).

The amount of the paid sick leave and paid family leave credit allowed to an employer in any calendar quarter cannot exceed the total payroll tax imposed on the wages paid with respect to all employees. If the amount of the credit that otherwise would be allowed exceeds the limitation, then the excess is treated as an overpayment that is refundable to the employer.

Employers must include the amount of the credits in their gross income. Also, no credit is allowed for wages for which a credit is claimed under Internal Revenue Code Sec. 45S (“Employer Credit for Paid Family and Medical Credit”). The credits are available only for the period beginning with the effective date and expire on December 31, 2020.

Self-Employed Individuals

With respect to both required paid family leave and sick leave, self-employed individuals will be entitled to a refundable credit against self-employment tax equal to the following amounts:

  • Emergency Paid Sick Leave – 100% of a self-employed individual's sick-leave equivalent amount or 67% of the individual's sick-leave equivalent amount if they are taking care of a sick family member, or taking care of a child following the closing of the child's school or childcare provider. The sick-leave equivalent amount is the lesser of average daily self-employment income or either (i) $511/day to care for the self-employed individual, or (ii) $200/day to care for a sick family member or child following a school closing. The sick leave equivalent may be claimed for a maximum of 10 days.  
  • Emergency Family and Medical Leave – lesser of $200 or 67% of their average self-employment income for a maximum of 50 days.

Takeaway

While the information contained herein provides a general overview of the updates in the law, each employer will likely face unique business and employment-related challenges and issues as they relate to these changes. Therefore, employers are encouraged to consult with their trusted advisors during this challenging period to ensure compliance with the law and any guidance issued thereunder.

We encourage you to reach out to your tax team at Wolf & Company if you have any questions about how this impacts your situation.

Tags: