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IRS and DOL Unveil Employer Tax Credits for Coronavirus-Related Leaves

The U.S. Treasury Department, the Internal Revenue Service (IRS), and the U.S. Department of Labor (DOL) recently  announced a plan to implement Coronavirus-related paid leave for workers and tax credits for small and midsize businesses to recover the cost of providing Coronavirus-related leave.

Quoting from the Society for Human Resource Management (SHRM) article, "IRS and DOL Unveil Employer Tax Credits for Coronavirus-Related Leaves" by Stephen Miller, CEBS (April 1, 2020):

Editor's note: This article has been updated from an earlier version posted on March 27, 2020.

Employers with fewer than 500 full-time or part-time employees can quickly begin taking advantage of two new refundable payroll tax credits designed to reimburse them, dollar for dollar, for the cost of providing leave to employees affected by COVID-19, the respiratory illness caused by the coronavirus. The Internal Revenue Service (IRS) and the Department of Labor (DOL) unveiled the plan in a March 20 press release.

The announcement clarifies how employers can obtain relief under the Families First Coronavirus Response Act (FFCRA), signed by President Donald Trump on March 18. The act, effective April 1 through the end of 2020, provides that the federal government will reimburse small and midsize businesses and nonprofit organizations for costs related to giving employees paid leave, either for the employee's own health needs or to care for family members.

Fast Funds

"To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes," the agencies said.

If an employer is paying out more in COVID-19-required leave than its payroll tax liability, "the employer can immediately file for a refund on forms that the IRS expects to issue" shortly, according to law firm Hanson Bridgett. The IRS expects to process these refunds within two weeks under a new, expedited procedure.

Eligible employers will be able to claim these credits based on qualifying leave they provide between April 1 and Dec. 31, 2020. Equivalent credits are available to self-employed individuals who become ill or must care for a family member.

Update: Eligible employers can now use Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance payment of tax credits. Employers must retain records supporting each employee's leave to substantiate the claimfor receiving payment of the advance credit, see How to Claim the Credits on the IRS website.

Help with Cash Flow

"Employers have been clamoring for guidance on the timing of reimbursement by the federal government for any paid leave they provide their employees after the law goes into effect," blogged Jeff Nowak, an attorney with Littler in Chicago. "Many employers have had to make difficult furlough and termination decisions worried about whether they would even have the cash flow to cover any paid leave mandates while waiting months, even a year, before the feds reimburse them."

As written, "the law simply was not realistic or workable as to employer tax credits, since the employer would be reimbursed at some later date—some weeks, months or even a year later—after the coronavirus damage had already been done," Nowak explained.

Under the new guidance, however, "the IRS made clear that employers would be able to recoup these payments immediately by keeping a portion of the deposit they otherwise would pay as part of their employees' federal, social security and Medicare taxes. This is welcome news."

Notably, Nowak said, employers will be able "to draw funds from the payroll and income tax they withhold from or pay on behalf of all employees and not just those to whom they must provide paid leave under the new statute."

Temporary Nonenforcement

The DOL said it would not bring an enforcement action against employers for any violations of the new leave requirements within the first 30 days the law is in effect, so long as the employer is acting in good faith to comply, Nowak noted. Good faith is shown when violations are remedied "as soon as practicable," the violations are not willful and the DOL receives a written commitment from the employer to comply with the FFCRA in the future.

Effective Dates Clarified

The IRS followed up on March 27 with Notice 2020-21, which provides that the tax credits for qualified sick leave wages and qualified family leave wages required to be paid by the FFCRA will apply to wages paid from April 1, 2020, through Dec. 31, 2020. The original press release had said the credits would be available starting April 2.

Paid-Leave Requirements

Among the paid-leave requirements under the FFCRA:

  • Eligible employers must provide two weeks (up to 80 hours) of paid sick leave at 100 percent of an employee's pay—up to a maximum of $511 per day, or $5,110 total over the two-week period—if the employee is unable to work because he or she is quarantined or experiencing symptoms associated with COVID-19 and seeking a medical diagnosis. A part-time employee is entitled to leave for his or her average number of work hours in a two-week period.
  • Eligible employers must provide two weeks (up to 80 hours) of paid sick leave at two-thirds of an employee's pay—up to a maximum of $200 per day, or $2,000 over the two-week period—if he or she is unable to work because of a need to care for someone subject to quarantine, if he or she must be absent to care for a child whose school is closed or whose child care provider is unavailable for reasons related to COVID-19, or if the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services.
  • In certain circumstances, employees who are unable to work because of a need to care for a child whose school is closed or whose child care provider is unavailable may receive up to an additional 10 weeks of paid leave at two-thirds of the employee's pay. However, employees will not receive more than $200 per day or $12,000 for the 12 weeks that include both paid sick leave and expanded family and medical leave, under these circumstances.

Employers are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed or for whom child care is unavailable if the viability of the business would be threatened by doing so.

The IRS gave these examples of how the new guidance would work:

  • If an eligible employer pays $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
  • If an eligible employer pays $10,000 in sick leave and is otherwise required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and could file a request for an accelerated credit for the remaining $2,000.