Families First Coronavirus Response Act: Payroll Tax Credits FAQ for Employers

Under the Families First Coronavirus Response Act (FFCRA), there were two payroll tax credits announced. One credit pertained to paid sick leave under the Emergency Paid Sick Leave Act (EPSL); the other credit relates to paid family and medical leave under the Emergency Family and Medical Leave Expansion Act (Expanded FMLA).

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Frequently Asked Questions

General Questions

What are the credits?

100% refundable tax credit for:

  • Qualified expanded sick leave wages (up to 10 days)
  • Qualified expanded family leave wages (up to 10 weeks)

PLUS

  • Qualified health plan expenses that are allocable to those wages
  • The employer’s share of Medicare taxes on those wages

When can I start claiming the credits?

Eligible employers can start claiming the tax credits for qualified leave wages for leave beginning on April 1, 2020 and ending on December 31, 2020.

Who qualifies as an eligible employer?

Businesses and tax-exempt organizations that have 500 employees or less and are required under the FFCRA to pay “qualified sick leave wages” and/or “qualified family leave wages.

What qualifies for sick leave wages?

An employee is eligible for the emergency paid sick leave if they are unable to work or telework because the employee is under quarantine or self-quarantine, has COVID-19 symptoms and is seeking medical help, or is care for a child whose school or place of care is close or child care provider is unavailable due to a COVID-19 related situation.

What qualifies for family leave wages?

An employee is eligible for expanded FMLA if they are unable to work or telework because the employee is caring for a child whose school or place of care is closed or child care provider is unavailable for COVID-19 related reasons.

What are the qualified health plan expenses?

  • The cost of maintaining health insurance coverage for the employee during the sick leave period to the extent that those amounts are excluded from the gross income of employees by reason of section 106(a) of the IRS Code.
  • The amount will take into account both the portion of the cost paid by the employer and the portion paid by the employee with pre-tax salary reduction contributions. However, it should not include the amounts that the employee paid for with after-tax contributions.

What is the calculation for qualified health plan expenses?

Any reasonable method to determine and allocate the plan expenses, including:

  • the COBRA applicable premium for the employee; or
  • any reasonable actuarial method to determine the estimated annual expenses of the plan.
  • Calculation of health plan expenses does not include HSA accounts or contributions to a QSEHRA.
  • Calculation of health plan expenses do include HRA or health/medical FSA.

Claiming the Credit

How do employers claim the credit for qualified leave wages?

Employers will report their total qualified leave wages and the related credits for each quarter on their federal employment tax returns (e.g. Form 941). Eligible employers can fund qualified leave wages by reducing their federal employment tax deposits.  The credit is allowed against the taxes imposed on employers on all wages and compensation paid to all employees.

How much can you retain from the federal employment taxes?

Employers that pay qualified leave wages will be able to retain an amount of all federal employment taxes equal to the amount of qualified leave wages paid PLUS the allocable qualified health plan expenses.

What does an employer need to do if they are reducing their federal employment tax deposits to pay for the qualified leave wages?

An eligible employer can reduce the amount of federal employment tax deposits paid equal to the amount of qualified leave wages paid in that quarter. The employer must account for the reduction in deposits on the Form 941 for the quarter.

Will an employer be penalized for reducing their federal employment tax deposits to fund qualified leave wages?

No, provided the employer does not claim an advance for the same portion of the credits it relied upon to reduce its deposits.  The total amount of the reduction cannot exceed the total amount of qualified leave wages.

How can an employer fund qualified leave wages if they don’t have sufficient federal employment taxes set aside for deposit to cover these payments?

If there are insufficient federal employment taxes to cover the amount of credits, an employer may request an advance payment of credits from the IRS by submitting Form 7200 – Advance Payment of Employer Credits Due to COVID-19.  An employer cannot claim an advance credit for the same portion of the credits it relied upon to reduce its deposit.

If the qualified leave wages plus qualified health plan expenses exceed the employer’s share of Social Security tax owed for a quarter, does the employer get a refund?

If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment and refunded to the employer.

Documentation Required

What information should an employer receive from an employee to substantiate eligibility for the sick leave or family leave credits?

A written request including:

  • 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
    • In the event of leave due to quarantine order or self-quarantine advice, the request should include the name of governmental entity or health care professional advising such
    • If the person subject to quarantine is not the employee, that person’s name and relation to employee should be included
    • In cases of school closing or child care provider unavailability, the request should include the name and age of child (or children) and the name of the school that has closed or place of care that is unavailable
  • A statement that the employee is unable to work, including by means of telework, for such reason

What documentation do I need to have?

Employers must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for credits as well as retaining:

  • Employer’s Quarterly Federal Tax Return (Form 941 )
  • Form 7200 – Advance Payment of Employer Credits Due to COVID-19
  • Any other applicable filings made to the IRS requesting the credit
  • Documentation to show how the employer determined the amount of qualified sick leave or family leave to be paid that is eligible for the credit.
  • Documentation to show how the employer determined qualified health plan expenses that the employer allocated to wages.

How long should an employer retain documentation?

All documentation and records should be kept on file for four years after the date the tax becomes due or is paid, whichever comes later.

Impact of FFCRA Credits on Other Relief Measures and Other Considerations

Can an employer receive both the tax credit for qualified leave wages under the FFCRA and the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)?

Yes, as long as the employer meets the requirements for both.

Can an employer receive the tax credits for qualified leave wages and receive a Small Business Interruption Loan under the CARES Act?

Yes; however, if the employer receives tax credits for qualified leave wages, those wages are not eligible as “payroll costs” for the purpose of loan forgiveness under the Paycheck Protection Program.

Can eligible employers receive credits under both section 45S (an existing employer credit for other paid family and medical leave) of the Internal Revenue Code and the tax credit for qualified leave wages?

No.

Are qualified leave wages subject to withholding of federal income tax and the employee’s share of Social Security and Medicare taxes?

Yes; they are also considered wages for purposes of other benefits that the employer provides, such as contributions to 401(k) plans.

Can employees continue to have salary reductions while on emergency paid sick leave or expanded FMLA?

Yes, as long as there is a salary reduction agreement in place.

Disclaimer: 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.