The Families First Coronavirus Response Act - Frequently Asked Questions Provided By IRS On Required Paid Sick and Family Leave Tax Credits

As we have previously reported, the Families First Coronavirus Response Act (the “FFCRA”), signed by President Trump on March 18, 2020, provides small and midsize employers refundable tax credits that reimburse them for the cost of providing required paid sick and family leave wages (together referred to as “leave wages” in this alert) to their employees for leave related to COVID-19.  Certain self-employed individuals in similar circumstances are entitled to similar credits. The FFCRA requires employers to provide paid leave to employees through two separate provisions: (1) up to 80 hours of paid sick time when they are unable to work for specified reasons related to COVID-19 and (2) up to ten days of paid family and medical leave.   Since the enactment of this legislation, the IRS has issued frequently asked questions (“FAQs”), updated periodically.  While the FAQs may not be relied upon as legal authority, they do provide additional guidance to taxpayers on the statutory provisions.  Following are highlights of these FAQs.

Basic Information

• The FFCRA provides businesses with tax credits to cover certain costs of providing employees with paid sick leave and expanded family and medical leave for reasons related to COVID-19 for the period April 1, 2020 through December 31, 2020.
• Only businesses and tax-exempt organizations that employ fewer than 500 employees (“eligible employers”) are eligible for the credits (only those businesses are required to provide qualified leave wages under the FFCRA). A business is considered to have fewer than 500 employees if, at the time leave is to be taken, the business employs fewer than 500 full-time and part-time employees within the United States, which includes any of the states, the District of Columbia, or any territory or possession of the United States.  Department of Labor guidelines  provide more detail as to which workers are taken into account for this 500 employee threshold, when business entities should be treated as separate employers and when they should be aggregated as a single employer.
• Eligible employers may claim the credits on their federal employment tax returns (e.g., Form 941, “Employer’s Quarterly Federal Tax Return”) but can benefit more quickly by reducing their federal employment tax deposits. If there are insufficient federal employment taxes to cover the amount of the credits, an eligible employer may request an advance payment of the credits from the IRS by submitting a Form 7200, “Advance Payment of Employer Credits Due to COVID-19.”  The eligible employer accounts for the amounts received as an advance when it files Form 941.
• If for any calendar quarter the amount of the credits to which the eligible employer is entitled exceeds the employer portion of the Social Security tax on all wages paid to all employees, then the excess is treated as an overpayment and refunded to the eligible employer.
• To substantiate eligibility to claim the tax credits for qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare taxes), eligible employers must retain records and documentation related to and supporting each employee’s leave and retain the Forms 941 and 7200 and any other applicable filings made to the IRS requesting the credit.
• The credits cover 100% of up to ten days of qualified sick leave wages and up to ten weeks of qualified family leave wages (and any group health plan expenses allocable to those wages) that an eligible employer paid during a calendar quarter, plus the amount of the eligible employer’s share of Medicare tax imposed on those wages.
• There is no credit for the employer portion of social security tax because qualified leave wages are not subject to that tax.
• An eligible employer may receive both the tax credits for qualified leave wages and for the employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) but not for the same wage payments.
• If an eligible employer receives tax credits for qualified leave wages, those wages are not eligible “payroll costs” for purposes of receiving loan forgiveness with respect to the Paycheck Protection Program loans.
• An eligible employer may reduce the amount of federal employment taxes it deposits for that quarter by the amount of the qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages) paid in that calendar quarter. The eligible employer must account for the reduction in deposits on Form 941 for the quarter. Such reduction in federal employment tax deposits does not result in a penalty for failing to deposit federal employment taxes. If an eligible employer does not initially pay an employee qualified leave wages when the employee is entitled to those wages, but pays those wages at a later date, the employer can claim the credits once it has paid the employee the qualified wages, as long as the qualified leave wages relate to leave taken during the period April 1, 2020 to December 31, 2020.

Taxation and Deductibility of Tax Credits

• An eligible employer must include the full amount of the credits for qualified leave wages (and any allocable qualified health plan expenses and the employer’s share of the Medicare tax on the qualified leave wages) in gross income.
• Generally, an eligible employer may deduct as a business expense an amount paid to an employee for qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of the Medicare tax on the qualified leave wages) for which it expects to claim the tax credits.
• An eligible employer may not claim a credit under IRC Sec. 45S [“Employer Credit For Paid Family and Medical Credit”] with respect to qualified leave wages for which it receives a tax credit under FFCRA, but it may be able to take a credit under IRC Sec. 45S with respect to additional wages paid, provided the requirements of IRC Sec. 45S are met with respect to the additional wages.

Use of Third Party Payers

• An eligible employer that uses a third-party payer (such as a professional employer organization, certified professional employer organization or agent) to report and pay its federal employment tax, and is otherwise eligible to receive the credits, is entitled to the FFCRA credits. The third-party payer is not entitled to the credits with respect to the wages it remits on the employer’s behalf.

Other Issues for Employers

• To the extent that an employee has a salary reduction agreement (e.g., a 401(k) plan) in place with the eligible employer, the FFRCA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.
• Qualified leave wages are wages subject to withholding of federal income tax and the employee’s share of social security and Medicare taxes. They are also considered wages for purposes of other benefits that the eligible employer provides, such as contributions to 401(k) plans.
• Tax-exempt organizations that are required to provide qualified leave wages under the FFCRA may claim the tax credits.

Employee Issues

• Qualified leave wages are taxable to employees and subject to Social Security and Medicare taxes.
• Qualified leave wages are not excluded from gross income as “qualified disaster relief payments.” IRC Sec. 139 excludes from a taxpayer’s gross income certain payments to individuals to reimburse or pay for expenses related to a qualified disaster. As described in the FAQs, while the COVID-19 outbreak is considered a “qualified disaster,” these qualified leave wages are not excludible because they are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular personal, family, or living expenses the individual would incur due to COVID-19. 
• An employee can receive both qualified sick leave wages and qualified family leave wages but at different times. So, for example, say an employee’s child care provider is unavailable indefinitely due to the COVID-19 outbreak, leaving the employee unable to work or telework to care for the child.  For up to the first 80 hours of any period of leave to care for the child, the employee is entitled to qualified sick leave wages, up to $200 per day and $2,000 in the aggregate.  After that, the employee is entitled to qualified family leave wages for up to ten weeks of additional leave, up to $200 per day and $10,000 in the aggregate.

Self-Employed Individuals

• An eligible self-employed individual for purposes of the qualified sick leave and family leave credit is an individual who regularly carries on any trade or business and would be entitled to receive qualified leave wages under the FFCRA if the individual were an employee of an eligible employer (other than himself or herself) that is subject to the requirements of the FFCRA.
• Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or their “qualified family leave equivalent amount.” The FAQs provide detailed information on how these amounts are calculated.
• A self-employed individual can receive both qualified leave wages (as an employee) and qualified sick or family leave equivalent amounts (as self-employed), but the sick or family leave equivalent amounts are offset by the qualified leave wages.
• Refundable credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts are claimed on the self-employed individual’s Form 1040 for the 2020 tax year.
• The self-employed individual may fund sick leave and family leave equivalents by reducing payments of estimated income taxes that the individual would otherwise be required to make but for the credit.