More details have emerged about the Families First Coronavirus Response Act (FFCRA) and how employers need to file for credits related to paying qualified sick and family leave wages or qualified wages.
As you know, the FFCRA requires businesses with fewer than 500 employees to provide emergency paid sick and family leave for reasons related to COVID-19, either for the employee’s own health needs or to care for family members. Below is a brief recap of the paid sick leave and family leave refundable credits along with some information on how employers are to calculate and receive those credits. Information is changing rapidly, so we encourage you to review the IRS Q&A on FFCRA which may provide answers to other questions you may have COVID-19 FAQs on the IRS website.
Paid Sick Leave Refundable Credit
Eligible employers are entitled to a fully refundable tax credit equal to the required paid sick leave. This tax credit also includes the employer’s share of Medicare tax imposed on those wages and its allocable cost of maintaining health insurance coverage for the employee during the sick leave period (qualified health plan expenses). The employer is not subject to the employer portion of Social Security tax imposed on those wages.
Paid Family Leave Refundable Credit
Eligible employers are entitled to a fully refundable tax credit equal to the required paid family and medical leave (qualified family leave wages). This tax credit also includes the employer’s share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the family leave period (qualified health plan expenses). As with the paid sick leave refundable credit, the employer is not subject to the employer portion of Social Security tax imposed on those wages.
Payment of the Sick and Family Leave Credit
Eligible employers are entitled to receive a credit in the full amount of the qualified sick leave wages and qualified family leave wages, plus allocable qualified health plan expenses and the employer’s share of Medicare tax, paid for leave during the period beginning April 1, 2020, and ending December 31, 2020.
Employers that pay qualified leave wages will be able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, rather than depositing them with the IRS.
The employment taxes that are available for the credits include:
- Withheld federal income tax;
- Employee share of Social Security and Medicare taxes; and
- Employer share of Social Security and Medicare taxes with respect to all employees.
Here are two examples:
Example 1. If an employer is entitled to a credit of $5,000 for qualified sick leave wages, certain related health plan expenses, and the employer’s share of Medicare tax on the leave wages and is otherwise required to deposit $8,000 in employment taxes, the employer could reduce its federal employment tax deposits by $5,000. The employer would only be required to deposit the remaining $3,000 on its next regular deposit date.
Example 2: If an employer is entitled to an employee retention credit of $10,000 and was required to deposit $8,000 in employment taxes, the employer could retain the entire $8,000 of taxes as a portion of the refundable tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using Form 7200.
In order to be eligible to receive sick or family leave credits, employers must document the reason for the employee’s leave. An employee should provide the employer a written request for such leave that includes:
- The employee’s name;
- The date or dates for which leave is requested;
- A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason; and
- A statement that the employee is unable to work, including by means of telework, for such reason.
In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include:
- The name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee,
- That person’s name and relation to the employee.
In the case of a leave request based on a school closing or child care provider unavailability, the statement from the employee should include:
- The name and age of the child (or children) to be cared for;
- The name of the school that has closed or place of care that is unavailable; and
- A representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave; and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than 14 during daylight hours,
- A statement that special circumstances exist requiring the employee to provide care.
Requesting advance payment (if applicable):
If the federal employment taxes yet to be deposited are not sufficient to cover the employer’s cost of qualified leave wages, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, the employer will be able file a request for an advance payment from the IRS.
To do this, employers need to complete Form 7200. Employers will also need to reconcile any advance credit payments and reduced deposits on their employment tax return(s) that they will file for 2020. Form 7200 is only required for employers requesting advance payments. Before requesting a credit amount, an employer should first reduce its employment tax deposits to account for the credits. The employer can then request the amount of the credit that exceeds its reduced deposits by either filing Form 7200 or waiting to get a refund when the employer claims the credits on their employment tax return.
Form 7200 can be filed for those wages paid between April 1, 2020, and December 31, 2020. The completed form is to be faxed to 855-248-0552.
Form 7200 should not be filed after the employer files Form 941 for the fourth quarter of 2020. Further, an employer should not file Form 7200 to request an advance payment for any anticipated credit for which the employer already reduced its deposits.
It is worth repeating: Employers claiming the credits for qualified leave wages must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for the credits.
As always, we will keep you updated as new information becomes available.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.