The IRS has announced that employers required to provide emergency paid sick leave and emergency paid family and medical leave under the Families First Coronavirus Response Act (the Act) can begin taking advantage of two new refundable payroll tax credits.  Equivalent credits are available to self-employed individuals based on similar circumstances.

Credits can be claimed based on qualifying leave they provide between the effective date of the Act and December 31, 2020.

Eligible employers

  • Businesses and tax-exempt organizations with fewer than 500 employees
  • Self-employed individuals

Emergency Paid Sick Leave and Emergency Paid Family and Medical Leave Situations

  • Employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis.

Employee Benefit

  • Two weeks’ worth of paid sick leave (80 hours).

Employer Credit Possible

  • Receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.
  • Employee is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19.

Employee Benefit

  • 2/3 of normal two weeks’ pay.

Employer Credit Possible

  • May claim a credit for 2/3 of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days.
  • Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
  • Employee is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19.

Employee Benefit

  • May in some instances receive up to an additional 10 weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Employer Credit Possible

  • Equal to 2/3 of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate.
  • Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Claiming Employer Credits

  • When making prompt tax payments:

Employers will be able to retain an amount of the payroll taxes (Form 941-related taxes – federal withholding, employee and employer share of social security and Medicare taxes) equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

  • If Employer Costs exceed Payroll Taxes Due:

An accelerated payment can be requested and will be paid for requests in two weeks or less.

Example.  If an eligible employer paid $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.

Example.  If an eligible employer paid $10,000 in sick leave and was 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 file a request for an accelerated credit for the remaining $2,000.

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small business exemption. The Information Release says that small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. The Department of Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Additional guidance is forthcoming.