Critical Guidance on COVID-19 Payroll Tax Credits
On March 20, 2020, the U.S. Treasury Department, Internal Revenue Service (IRS) and the Department of Labor (DOL) announced their plan to make two new, refundable payroll tax credits available for small and midsize employers covered by the Families First Coronavirus Response Act (the act). The act requires that certain employers provide paid sick leave and paid leave under the Family and Medical Leave Act (FMLA) to employees impacted by COVID-19 (a.k.a. coronavirus). The act will be effective April 1, 2020, and is set to expire on December 31, 2020. The two new tax credits are designed to reimburse employers for costs associated with providing COVID-19 related leave to their employees. This article will provide employers with the information necessary to take advantage of this financial relief.
The tax credits are available to employers of small and midsize businesses that are required by the act to provide paid leave for COVID-19 related circumstances. Businesses and tax-exempt organizations with fewer than 500 employees are immediately eligible for the dollar-for-dollar tax offset against payroll taxes as a reimbursement for this paid leave. Governmental employers are not eligible.
Under the act, eligible employers must provide emergency paid sick leave and emergency paid family and medical leave to employees unable to work for reasons related to COVID-19. Tax credits may be claimed by eligible employers for qualifying leave provided between the effective date of the act, April 1, 2020, and December 31, 2020. The types of qualifying leave are as follows:
Paid Leave. The act allows employees of eligible employers to receive two weeks of paid sick leave at 100% of the employee’s pay if that employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms and seeking a medical diagnosis. Employees can receive up to two weeks of paid sick leave at two-thirds the employee’s pay if that employee is unable to work because the employee is caring for someone subject to quarantine or for a child whose school or child care provider is not available due to COVID-19 related reasons. This paid leave may be extended for up to an additional ten weeks in some instances. Two-thirds paid leave also is available for employees experiencing conditions similar to those specified by the Department of Health and Human Services (HHS) as conditions for such paid leave.
Paid Sick Leave Credit. Employees unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms and seeking a medical diagnosis, may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day, for up to ten days. Employees unable to work because the employee is caring for someone subject to quarantine or for a child whose school or child care provider is not available due to COVID-19 related reasons can claim credit for two-thirds of the employee’s pay, up to $200 per day, for up to ten days. Additional tax credits may be available for eligible employers based on costs to maintain health insurance coverage for eligible employees during this leave period.
Child Care Leave Credit. Employees unable to work because the employee is caring for a child whose school or child care provider is not available due to COVID-19 related reasons may receive a refundable child care leave credit equal to two-thirds of the employee’s pay, up to $200 per day, for up to ten weeks. Additional tax credits may be available for eligible employers based on costs to maintain health insurance coverage for eligible employees during this leave period.
How to Receive Tax Credits
Typically, employers are required to withhold federal income taxes and the employees’ share of Social Security and Medicare taxes when paying employees. The employer then deposits these taxes with the IRS. Now, eligible employers who pay for COVID-19 related leave will be permitted to retain an amount of payroll taxes equal to the amount of qualifying sick and child care leave paid to their employees, rather than depositing those funds to the IRS.
Eligible employers will show the qualifying amount as a credit against the payments when due. The credit against payment will offset federal income tax withholding, as well as Social Security and Medicare taxes of both the employer and its employees. If these payroll taxes are not enough to cover the cost of paid leave, employers can make a request to the IRS for an accelerated payment.
Small Business Exemption
Where leave requirements related to school closings or unavailable child care would threaten a small business’s ability to survive, an exemption to those requirements may be available. The small business must have fewer than 50 employees and satisfy simple and clear criteria that establish a need for the exemption in order to continue. The DOL will provide guidance on this standard.
Federal Loan Alternative
If your business qualifies for one or more of these credits, it may also qualify for one or more of the federally guaranteed loans in the CARES Act just passed. Some of these loans are forgivable, making them a grant. Businesses may be required to choose between tax credits or one of these loans. Please look for more information on our website, or register for our webinar on Tuesday, March 31.
Should you have any questions regarding these tax credits, please contact Mr. Harden.
Anna L. Crisp, a law clerk with Eastman & Smith who is finishing her third year at The Ohio State University Moritz College of Law, contributed to this article.
At the date of publication the above information was correct. It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation.
The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.