Update on Families First Coronavirus Response Bill—Payroll Taxes and Tax Credits
As discussed in our recent update, the Families First Coronavirus Response Act (the “Act”), which is expected to take effect on taking effect April 1, 2020 according to recent Department of Labor guidance, requires certain employers to provide Emergency Paid Sick Leave and Emergency Paid Family and Medical Leave.1
Payroll Tax Treatment of Required Sick and Family Leave Wages
The Act exempts qualified sick and family leave wages from the employer portion of Social Security tax.2 There are no provisions under the Act exempting the wages from being treated as compensation for other tax purposes. As such, the employer is required to pay the employer portion of Medicare taxes with respect to the qualified sick and family leave wages.3 Qualified sick and family leave wages are also subject normal withholding including federal income tax withholding and employee’s portion of Social Security and Medicare taxes.
Tax Credits
The Act provides for refundable tax credits for most employers who are required to provide the qualified sick and family leave pay under the Act (see Division G of the Act). It is notable that the credits do not apply to the United States Government, the government of any State or political subdivision thereof, or any agency or instrumentality of the foregoing.4
The tax credits are divided into four types: (1) tax credits to eligible employers who pay sick leave as required under the Emergency Paid Sick Leave Act;5 (2) tax credits to eligible employers who pay family leave as required under the Emergency Paid Family and Medical Leave Act;6 (3) tax credits to eligible self-employed individuals who are unable to perform their job for reasons that would entitle the individual to receive sick leave wages under the Emergency Paid Sick Leave Act;7 and (4) tax credits to eligible self-employed individuals who are unable to perform their job for reasons that would entitle the individual to receive family leave wages under the Emergency Paid Family and Medical Leave Act.8
These tax credits are allowed against the employer portion of Social Security taxes9 or against an eligible self-employed individual’s self-employment tax.10 The tax credits are subject to limitations, as discussed below, but if the aggregate credits for qualified sick and family leave wages paid by the eligible employer with respect to a calendar quarter exceeds the employer's portion of the quarterly Social Security tax payments payable with respect to all employees, or if the aggregate credits for an eligible self-employed individual exceed with respect to a calendar year exceeds the individual’s self-employment tax for such year, the excess is treated as an overpayment and will result in a refund for the employer.11
Limitations on Credits
The tax credits are equal to the qualified sick and family leave paid by the employer in a given quarter or that a self-employed individual would receive if the individual were employed by an eligible employer, subject to overriding limitations. The limitations vary based on whether the credit is to an eligible employer or eligible self-employed individual and whether the credit is for paid sick leave or paid family leave. The following is a summary of the limitations:
Tax Credits to Eligible Employer
Tax Credit for Paid Sick Leave: The tax credit available to an eligible employer in a given calendar quarter for wages paid for required sick leave under § 5102 of the Act is equal to the actual amount of required sick leave paid in the quarter but shall not exceed $200 (or $511 for paid sick time described in Act § 5102(a)(1) – (3)) for any day an employee is paid qualified sick leave wages and the number of days of sick leave that can be taken into account for the credit with respect to any individual employee is equal to 10 days less the aggregate number of days taken into account for such employee in a previous quarter.12
Tax Credit for Paid Family Leave: The tax credit available to an eligible employer in a given calendar quarter for wages paid for required family leave under the Emergency Paid Family and Medical Leave Act is equal to the actual amount of required qualified family leave paid in the quarter but shall not exceed $200 for any day an employee is paid qualified family leave wages. The credit is also subject to the overriding limit that the credit for family leave wages paid to an employee in aggregate over all calendar quarters cannot exceed $10,000.13 The family leave credit shall be reduced by certain credits allowed in such quarter, including credits for qualified sick leave.14
Tax Credits to Eligible Self-Employed Individuals
Tax Credit for Paid Sick Leave: The tax credit available to an eligible self-employed individual in a given calendar year for the qualified sick leave equivalent amount is equal to (a) the number of days, but not more than 10 days, the individual is unable to work for reasons that would entitle the individual to receive sick leave wages under the Emergency Paid Sick Leave Act if the individual were employed by an eligible employer, multiplied by (b) the lesser of (i) $200 (or $511 for paid sick time described in Act § 5102(a)(1) – (3)) and (ii) 67% (or 100% for paid sick time described in Act § 5102(a)(1) – (3)) of the individual’s average daily self-employment income for the tax year.15
Tax Credit for Paid Family Leave: The tax credit available to an eligible self-employed individual in a given calendar year for the qualified family leave equivalent amount is equal to (a) the number of days, but not more than 50 days, the individual is unable to work for reasons that would entitle the individual to receive family leave wages under the Emergency Paid Family and Medical Leave Act if the individual were employed by an eligible employer, multiplied by (b) the lesser of (i) $200 and (ii) 67% of the individual’s average daily self-employment income for the tax year.16
Increase in Tax Credits Available
The amount of credit available to an eligible employer for qualified sick leave paid shall be increased, dollar-for-dollar, by the eligible employer’s qualified health plan expenses that are allocable to the qualified sick leave wages for which the sick leave credit is allowed.17 In addition, the credit available to an eligible employer for qualified sick and/or family leave paid shall be increased, dollar-for-dollar, by the amount of employer portion Medicare tax imposed on such sick and/or family leave wages.18
There are still many open questions as to how the tax credits will be implemented. The Treasury, IRS and DOL announced last week that guidance will be provide shortly. See our related post regarding the announcement.
If you have any questions please contact a member of our Employment Law Group or our Taxation Law Group for more information.
1 See Divisions C and E of the Act.
2 Act § 7005(a).
3 IRC §§ 3111(b) and 3221(b).
4 Act §§ 7001(e)(4) and 7003(e)(4).
5 Act § 7001.
6 Act § 7003.
7 Act § 7002.
8 Act § 7004.
9 Act §§ 7001(a) and 7003(a).
10 Act §§ 7002(a) and 7004(a).
11 Act §§ 7001(b)(4), 7002(d)(1), 7003(b)(3), and 7004(d)(1).
12 Act § 7001(b).
13 Act § 7003(b)(1).
14 Act § 7003(b)(2). The practical effect of this offset is unclear (i.e. an overall reduction or only a reduction for credits applicable to a specific employee allowed for a specific day). IRS and DOL guidance on implementation should be instructive.
15 Act § 7002(c). See Act § 7002(c)(2) for a definition of average daily self-employment income.
16 Act § 7004(c). See Act § 7004(c)(2) for a definition of average daily self-employment income.
17 Act § 7001(d)(1). See Act § 7001(d)(2) for a definition of qualified health expenses.
18 Act § 7005(b).