Congress passed legislation that allows companies to delay and/or retain payroll taxes in order to be reimbursed for the expense of paid leave for COVID-19 reasons or to assist companies in keeping employees on the payroll.
Tax Credits for COVID-19 Paid Leave, effective April 1, 2020 – Dec 31, 2020
Covered employers qualify for dollar-for-dollar reimbursement through tax credits for all qualifying wages paid under the Families First Coronavirus Response Act (FFCRA). Qualifying wages are those paid to an employee who takes leave under the Act for a qualifying reason. Applicable tax credits also extend to amounts paid or incurred to maintain health insurance coverage.
The paid sick leave and expanded family and medical leave provisions of the FFCRA apply to certain public employers and private employers with fewer than 500 employees. Small businesses with fewer than 50 employees may qualify for exemption from the requirement to provide leave due to school closings or childcare unavailability if the leave requirements would jeopardize the viability of the business.
In HR 6201, the Families First Coronavirus Response Act, employers are required to provide:
- Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay (up to $511/day or $5110 in aggregate) where the employee is unable to work because the employee is quarantined (pursuant to Federal, State, or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis; or
- Two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s regular rate of pay (up to $200/day or $2000 in aggregate) because the employee is unable to work because of a need to care for an individual subject to quarantine (pursuant to Federal, State, or local government order or advice of a health care provider), or care for a child (under 18 years of age) whose school or child care provider is closed or unavailable for reasons related to COVID-19, and/or the employee is experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of the Treasury and Labor.
A covered employer must also provide to employees that it has employed for at least 30 days*:
- Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds the employee’s regular rate of pay (up to $200/day or $2000 in aggregate) where an employee is unable to work due to the need for leave to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19.
Qualifying reasons for leave
Under the FFCRA, an employee qualifies for paid sick time if the employee is unable to work (or unable to telework) due to a need for leave because the employee:
- is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- has been advised by a health care provider to self-quarantine related to COVID-19;
- is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
- is caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19; or
- is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury
Who pays for the emergency paid sick leave?
Employers initially front the cost of emergency paid sick leave but will be fully reimbursed by the federal government within three months. The reimbursement will cover both the wages paid and the employer’s contribution to employee health insurance premiums during the period of leave. Employers will be reimbursed through a refundable tax credit that counts against employers’ payroll tax, which all employers pay regardless of non-profit/for-profit status. Employers will submit emergency paid sick leave expenses as part of their estimated quarterly tax payments. If employer’s costs more than offset their tax liability, they will get a refund from the IRS.
Paid leave advance
Advances of the payroll tax credit will be available based on the calculated paid leave amounts against the projected payroll taxes calculated from the most recent payroll period in the quarter. This credit will be advanced “according to the forms and instructions provided by the Secretary [of the Treasury]”. (These instructions are yet to be released as of March 29, 2020)
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is found in Section 2301 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Employers, who do not take out an SBA Loan, may retain payroll taxes in efforts to keep employees on the payroll if their operations were fully or partially suspended, due to a COVID-19-related shut-down order, or gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The ERTC allows a credit in each calendar quarter against payroll taxes in the amount of 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the coronavirus-related circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for wages paid or incurred from March 13, 2020, through December 31, 2020
If the amount of tax credits exceeds the applicable employment taxes for any quarter, the excess will be treated as an overpayment that will be refunded by the IRS.
2020 Payroll tax deferral
Employers will be able to delay paying the employer portion of social security taxes for 2020. 50% of 2020 payroll taxes will now be due by December 31, 2021, with the remaining 50% due by December 31, 2022. If an employer has debt forgiven under the CARES Act, then they do not qualify for the deferral.
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* This includes an employee who was laid off by that employer not earlier than March 1, 2020, had worked for the employer for not less than 30 of the last 60 calendar days prior to the employee’s layoff, and was re-hired by the employer.
References: Library of Congress Coronavirus Resource Guide https://blogs.loc.gov/law/2020/03/coronavirus-resource-guide/ and Coronavirus Aid, Relief, and Economic Security (CARES) Act https://www.congress.gov/bill/116th-congress/senate-bill/3548/text