May 6, 2020
The Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES Act), provide refundable tax credits to certain employers that continue to pay their employees during the COVID-19 pandemic. The Internal Revenue Service is also providing employers eligible for these credits with relief from the penalty for failing to timely deposit employment taxes.
FFCRA Tax Credits
FFCRA established the qualified sick leave wages credit and the qualified family leave wages credit for employers to pay eligible employees during the period April 1, 2020, to December 31, 2020.
Under the FFCRA, eligible employers are businesses and tax-exempt organizations that have fewer than 500 employees and are required under the FFCRA to pay qualified sick leave wages and qualified family leave wages. An employee qualifies for paid sick time if the employee is unable to work (or unable to telework) due to a need for leave because the employee is:
- subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- advised by a health care provider to self-quarantine related to COVID-19;
- experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
- Caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19; or
- experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
FFCRA Qualified Sick Leave Tax Credits
Covered employers qualify for dollar-for-dollar reimbursement through tax credits for all qualifying wages paid under the FFCRA. Qualifying wages are those paid to an employee who takes leave under the Act for a qualifying reason, up to the appropriate per diem and aggregate payment caps.
The credit also includes the amount of the eligible employer’s share of Medicare tax imposed on the qualified sick leave wages and any qualified health plan expenses allocable to those wages. Qualified health plan expenses are amounts paid or incurred by the eligible employer to provide and maintain a group health plan to the extent that the amounts are excluded from the employees’ gross income under section 106(a) of the Internal Revenue Code. The qualified sick leave wages are not subject to the employer portion of social security tax.
The credit for the employer’s share of Medicare tax does not apply to eligible employers that are subject to Railroad Retirement Tax Act (RRTA) because qualified sick leave wages are not subject to Medicare tax under RRTA.
The FFCRA provides a
comparable credit for self-employed individuals
carrying on any trade or business within the meaning of section 1402 of the Internal Revenue Code if the self-employed individual would be entitled to receive paid sick leave under the Emergency Paid Sick Leave Act
(
EPSLA
)
if the individual were an employee of an employer (other than him or herself).
If the employee is on sick leave because of their own health status, the limit is $511 per day up to a total of $5,111. If the employee is on sick leave because they are caring for others, the limit is $200 per day up to a total of $2,000.
Qualified Family Leave Credits
Qualified family leave wages are defined in section 3121(a) of the Internal Revenue Code for social security and Medicare tax purposes. Eligible employers must pay employees for periods of leave during which they are unable to work or telework due to a need for leave to care for a child of such employee if the child’s school or place of care has been closed, or because the child care provider of the child is unavailable, due to COVID-19 related reasons. The first ten days for which an employee takes leave for this reason may be unpaid. However, during that 10-day period, an employee may be entitled to receive qualified sick leave wages as provided under the ESPLA or may receive other forms of paid leave, such as accrued sick leave, annual leave, or other paid time off under the eligible employer’s policy. After an employee takes leave for ten days, the eligible employer must provide the employee with qualified family leave wages for up to ten weeks.
An eligible employer may claim a fully refundable tax credit equal to 100% of the qualified family leave wages, allocable qualified health plan expenses, and the eligible employer’s share of Medicare tax on the qualified family leave wages it pays.
The eligible employer is required to pay the employee qualified family leave wages in an amount equal to at least two-thirds of the employee’s regular rate of pay, multiplied by the number of hours the employee otherwise would have been scheduled to work, not to exceed $200 per day and $10,000 in the aggregate for the calendar year.
The same rules apply for allocating the cost of healthcare benefits and the amount of the eligible employer’s share of Medicare tax as for the qualified sick leave tax credits. The credit also does not apply to the employer’s share of Medicare tax that are subject to RRTA.
Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for an Employee Retention Credit. This credit is designed to encourage eligible employers to keep employees on their payroll. Unlike the credits available under the FFCRA, the number of employees an employer has does not affect whether it is an eligible employer that may claim the credit.
The credit equals 50% of the qualified wages including qualified health plan expenses that an eligible employer pays in a calendar quarter after March 12, 2020 and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.
Eligible employers are those businesses, including tax-exempt organizations, with operations that have been fully or partially suspended due to governmental orders due to COVID-19 or that have a significant decline in gross receipts compared to 2019. An employer is considered to have a significant decline in gross receipts for the period beginning with the first calendar quarter in 2020 for which its gross receipts are less than 50% compared to the same calendar quarter in 2019 and ending with the earlier of January 1, 2021 or the first calendar quarter after the quarter for which gross receipts are greater than 80% for the same calendar quarter in 2019.
Generally, essential businesses are not considered eligible employers unless their business is full or partially suspended because their suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to close its operations.
Employers may claim the Employee Retention Credit on qualified wages paid in 2020 if it determines that a significant decline in gross receipts occurred in 2020 even if it does not make the determination until after January 1, 2021. In this case, the employer may claim the credit by filing the appropriate form to report adjustments to its employment taxes, typically Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
Self-employed individuals are not eligible for the Employee Retention Credit with respect to their own self-employment earnings. However, a self-employed individual who employs individuals in its trade or business and who otherwise meets the requirements to be an Eligible Employer may be eligible for the Employee Retention Credit with respect to qualified wages paid to the employees. Household employers are not considered to operate a trade or business and, therefore, are not eligible for the Employee Retention Credit, with respect to their household employees.
Reporting These Tax Credits
Eligible employers will report their total qualified leave wages and the related credits for each quarter on their federal employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return. Form 941 is used to report income, social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax.
In anticipation of receiving the credits, eligible employers can fund qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages) by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance from the IRS.
Considerations
The FFCRA and CARES Act benefits include other tax credits, tax deferrals, and loans. Employers will need to consider which of these are appropriate for their circumstances. In certain cases, if the employer takes advantage of one of the tax benefits or receives a loan, other tax benefits may not be available. The specific tax and loan benefits employers must consider include:
- Paid sick leave and family leave refundable tax credits. Employers with fewer than 500 employees are required to provide paid sick or family leave to employees who are unable to work or telework due to certain circumstances related to COVID-19. These employers are entitled to refundable tax credits for the required leave paid, up to specified limits. However, the wages paid to employees that count for the paid leave credits cannot also be counted for purposes of claiming the Employee Retention Credit.
- Employment tax deferral. All employers may defer the deposit and payment of the employer’s share of social security tax imposed under section 3111(a) of the Internal Revenue Code. However, employers that received a Paycheck Protection Program (PPP) loan may not defer the deposit and payment of the employer’s share of social security tax that is otherwise due after the employer receives a decision from the lender that the loan is forgiven.
- Paycheck Protection Program (PPP) loans. Small and mid-sized businesses may obtain a PPP loan that provides funds for up to eight weeks of payroll costs, including health and retirement benefits, and certain other expenses. The PPP loans may be fully forgiven when at least 75% of the funds are used for payroll costs and other requirements are satisfied. However, an employer that receives a PPP loan is not allowed the Employee Retention Credit and is not permitted to defer the applicable employment tax after the employer receives a decision from the lender that the loan is forgiven.
We will continue to monitor this and keep you abreast of changes. Please visit our
COVID-19 Resource Page
for more updates.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at
Richard.Higgins@MCC-CPAs.com
. I can be reached at
Marty.McCarthy@MCC-CPAs.com
. As always, we are happy to help.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Sources: The Internal Revenue Service and U.S. Department of Labor
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
