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IRS addresses Families First Act tax credits

Apr 7, 2020

The Internal Revenue Service (IRS) continues to generously interpret the Families First Coronavirus Response Act (FFCRA), deploying the “qualified leave tax credit” to maximize the benefit for employers and provide speedy aid, while adding new conditions to the “qualified family leave” mandate. The FFCRA, enacted by Congress on March 18, 2020, mandated paid sick leave and an expansion of paid family leave for employers with fewer than 500 employees, beginning April 1, 2020 and ending December 31, 2020. Congress intended to foot the bill for this costly COVID-19-related policy via dollar-for-dollar tax credits for employers up to specified maximum dollar amounts. The FFCRA creates a refundable tax credit to reimburse employers 100% for wages paid to employees taking “qualified leave” (the “qualified leave tax credit”). Under the FFCRA, the Emergency Paid Sick Leave Act requires employers provide employees paid sick leave not to exceed $511 per day for ten days for various COVID-19 related causes, and The Emergency Family and Medical Leave Expansion Act requires employers provide an additional ten weeks of paid leave up to $200 per day for family leave for workers unable to work (or telework) due to lack of child care from COVID-19 school and daycare closures. For information please visit Waller’s prior blog post on the FFCRA. Since the passage of the Act, subsequent amendments and the IRS’s two press releases provide employers immediate relief and larger tax credits than expected. Further, the IRS procedure for employers to obtain qualified leave tax credits limits qualified family leave that employees can take under the FFCRA.

How is the qualified leave tax credit calculated?

Sections 7001 and 7003 of the FFCRA provide a refundable tax credit equal to the amount qualified leave wages paid by “eligible employers” plus its allocable cost of maintaining health insurance coverage for the employee during the sick leave period (“qualified health plan expenses”). See Appendix A for the statutory requirements for qualified sick leave and qualified medical leave. An eligible employer is an employer who (i) has fewer than 500 employees at the time leave is taken by an employee, and (ii) are required under the FFCRA to pay qualified leave wages. The IRS went a step further in its March 31st IRS News Release, “COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs” (hereinafter “IRS FAQ”), stating that the qualified leave credits will also include the employer’s share of the Medicare taxes on qualified leave wages, which is an additional 1.45%.(Employers subject to the Railroad Retirement Tax Act are not subject to either OASDI tax or Medicare tax on the qualified leave wages; thus, they do not get a credit for Medicare tax.)

  • The IRS FAQ provides an example where an employer who pays $10,000 in qualified leave wages will receive a qualified leave tax credit equal to $10,145 (the sum of the qualified leave wages and the associated Medicare tax). The example did not take into account qualified health plan expenses.
  • “Qualified health plan expenses” are defined in the FFCRA as amounts paid or incurred by the employer to provide and maintain a group health plan (as defined in section 5000(b)(1) of the Internal Revenue Code of 1986 (“the Code”)), but only to the extent that such amounts are excluded from the gross income of employees by reason of section 106(a) of the Code.
  • Congress delegated prescribing the method of allocation of qualified health plan expenses to the IRS. The IRS FAQ stated that qualified health plan expenses are properly allocated to the qualified sick or family leave wages if the allocation is made on a pro rata basis among covered employees (for example, the average premium for all employees covered by a policy) and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate). Qualified health plan expenses may include employers contributions to a health reimbursement arrangement or health flexible spending arrangement, but does not include contributions to a qualified small employer health reimbursement arrangement.
  • Certain self-employed persons can also take advantage of the qualified leave tax credit. See the discussion below regarding self-employed persons.

How can employers use the qualified leave tax credit?

Eligible employers may use the qualified leave tax credit to offset the employer portion of Old Age, Survivors, and Disability Insurance (OASDI) taxes, which is 6.2% of all wages. In order to prevent an employer from receiving both a deduction and a credit, the credit is taxable income to the employer that generally offsets the deduction for the wages. An employer cannot claim a credit under Code Section 45S with respect to qualified sick leave wages eligible for the credit, but any additional sick leave wages may be eligible for inclusion in Code Section 45S credit calculation. The Code Section 45S credit was created by the Tax Cuts and Jobs Act and is not limited by employer size. The employer credit is available with respect to employees earning $75,000 or less and is 12.5% to 25% of the sick or leave pay remitted to the individual. To use this credit the employer must have a written policy in place providing not less than two weeks of annual paid family leave at least half of normal pay. The maximum amount of family and medical leave that may be taken into account with respect to any employee for any taxable year shall not exceed 12 weeks. Any leave that is mandated by State or local law or paid by a State or local government does not count in determining the amount of paid family and medical leave provided by the employer.

In another positive move for employers, the IRS pronounced that the federal employment taxes available for retention by employers to pay qualified leave wages include federal income taxes withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare taxes with respect to all employees. The ability to retain practically all of the federal employers employment taxes and the income tax withholding on the employee’s compensation to immediately satisfy the credit is a great step toward easing employers’ cash flow problems satisfying the new legal obligation.

What if the employer still is unable to cover the cost of qualified leave?

Section 3606 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) amended the FFCRA to provide advanced funding of the qualified leave tax credits if the federal employment and withholding taxes yet to be deposited are not sufficient to cover the eligible 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 on new IRS Form 7200. The IRS stated it expects to begin processing these requests in April 2020. Self-employed persons are not permitted to use Form 7200 to request an advance of credits.

How does a self-employed person use the qualified leave tax credit?

Certain self-employed individuals can utilize the 100% qualified leave tax credit. An eligible self-employed individual means an individual who regularly carries on any trade or business within the meaning of Section 1402 of the Code, and would be entitled to receive qualified leave wages under the FFCRA if the individual were employed by an eligible employer (other than himself or herself) that is subject to the requirements of the FFCRA. Note, the person’s leave must be between April 1, 2020 and December 31, 2020 to qualify. The self-employed individual’s tax credit is calculated as if he or she were employed by an eligible employer under the FFCRA:

  • The qualified leave tax credit is equal to the self-employed person’s “qualified sick leave equivalent amount” based on the lesser of either (i) 100% or 67% (depending on the cause of leave) of the self-employed individual’s “average daily self-employment wage” or (ii) the statutory maximums. The maximum wage is $511 per day or $200 per day, as the case may be. (See Appendix A for the statutory requirements for qualified sick leave and qualified medical leave. For additional discussion please see the Waller blog post, linked here.)
  • The “average daily self-employment income” is an amount equal to the net earnings from self-employment for the taxable year divided by 260.
  • A self-employed individual’s qualified leave tax credit will be reduced by any qualified leave wages the individual receives from an employer.

The qualified leave tax credit may be used towards the self-employed individual’s own Self Employment Contribution Amount (SECA), an amount comparable to the employer portion of OASDI. The refundable tax credits are claimed on his or her Form 1040 (U.S. Individual Income Tax Return) tax return for the 2020 tax year that is filed in 2021. The IRS provided that the self-employed individual may fund qualified leave equivalents by taking into account the credit to which the individual is entitled and claiming it on the Form 1040 in determining required estimated tax payments.

What is required to support a claim for qualified leave tax credits?

The IRS FAQ sheds light on the requirements for claiming “qualified leave,” particularly qualified family leave, by requiring eligible employers to retain a statement from employees with certain information corroborating the qualified leave.( See Appendix B for the IRS’s new requirements for statements from employees that eligible employers must retain to substantiate qualified leave.) The IRS procedure for substantiating qualified family leave requires a statement from the employee that the no other person will be providing care to the child(ren) during the applicable period. Further, if a child for whom the employee is caring is over the age of 14, the employee must provide an explanation of special circumstances. The FFCRA itself provides that qualified family leave includes leave to take care of children under the age of 18. Thus, the IRS FAQ provides a narrow reading of qualified family leave and creates further questions. For instance, would children 15 or older be considered child care providers for children under fifteen? The Department of Labor is the official administrator of qualified leave under the FFCRA and will hopefully provide more clarity.

Employers who intend to use the qualified leave tax credit must retain, for at least four years after the later of when the tax becomes due or is paid, any records and documentation related to and supporting each qualified leave to substantiate the claim for the credits, the Forms 941, Employer's Quarterly Federal Tax Return, and 7200, Advance of Employer Credits Due To COVID-19, and any other applicable filings made to the IRS requesting the credit. Likewise, self-employed individuals should retain records and documentation related to his or her qualified leave equivalent and Form 1040, as well as any other applicable filing made to the IRS requesting the credit.

Appendix A

Qualified Sick Leave Wages

Cause of Leave

An eligible individual who is unable to work or telework because the individual:

  • Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
  • Has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19; or
  • Is experiencing symptoms of COVID-19 and seeking a medical diagnosis

Length of Leave

  • 10 days paid leave with a maximum of 80 hours
  • Calculated on the basis of the number of hours the employee is normally scheduled (or six-month average to calculate daily hours)

Qualified Wages

  • The lesser of each employee’s:
  • normal wages (or “average daily self-employment income” for self-employed individuals), or
  • $511/day ($5110 for 10 days)
  • Plus qualified health plan cost and employer share of Medicare Tax

Cause of Leave

An eligible individual who is unable to work or telework because the individual:

  • Is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19;
  • Is caring for a child if the child’s school or place of care has been closed, or child care provider is unavailable due to COVID-19 precautions; or
  • Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor

Length of Leave

  • 10 days paid leave with a maximum of 80 hours
  • Calculated on the basis of the number of hours the employee is normally scheduled (or six-month average to calculate daily hours)

Qualified Wages

  • The lesser of each employee’s:
  • 67% of normal wages (or “average daily self-employment income” for self-employed individuals), or
  • $200/day ($2000 for 10 days)
  • Plus qualified health plan cost and employer share of Medicare Tax

Qualified Family Leave Wages

Cause of Leave

  • Need for leave to care for the son or daughter under 18 years of age of such employee if the school or place of care has been closed, or their child care provider is unavailable, due to COVID-19

Length of Leave

  • Initial 10 days of leave unpaid (which may be coupled with paid leave such as qualified paid sick leave);
  • 10 weeks paid leave thereafter
  • Calculated on the basis of the number of hours the employee is normally scheduled (or six-month average to calculate daily hours), with no maximum number of hours

Qualified Wages

  • The lesser of each employee’s:
  • 67% of normal wages (or “average daily self-employment income” for self-employed individuals), or
  • $200/day ($2000 for 10 days).
  • Maximum wages of $10,000
  • Plus qualified health plan cost and employer share of Medicare Tax

Additional guidance is available from the Department of Labor with respect to qualified leave requirements here.

Appendix B – Substantiation Requirements for Families First Sick Leave and Family Leave (In Absence of Official IRS Guidance, Self-Employed Should do Equivalent)

Required Statement from Employee

An eligible employer must collect a statement from the employee requesting qualified leave that states the following:

  • 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.

Additional Required Statements

In the case of a paid sick leave request on the basis of a quarantine order or self-quarantine advice, the statement should include:

  • The name of the governing body ordering the quarantine or the name of the health care professional advising self-quarantine.
  • If the person subject to quarantine or advised self-quarantine is someone other than the eligible employee, the name of the person for whom the eligible employee is caring for and the relation to the employee.

In the case of a family leave request based on a school closing or child care provider unavailability, the statement should include:

  • The name of 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;
  • 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 fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.

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