By Emily S. Pontius and Olivia N. Norwood
What is the process for obtaining the tax credit for COVID-19 related leave paid under the Families First Coronavirus Response Act (FFCRA)?
Beginning on April 1, 2020, employers covered under the FFCRA are required to pay sick leave and FMLA leave to certain employees affected by the COVID-19 pandemic. Eligible employers who pay leave required under the FFCRA will be fully reimbursed for these payments through payroll tax credits. The Treasury Department, Internal Revenue Service (IRS) and Department of Labor (DOL) issued a statement detailing how employers can swiftly recover their costs to provide paid leave under the FFCRA. The IRS has also published a FAQ relating to COVID-19 related tax credits.
What is recoverable?
Employers will receive a full reimbursement for sick leave and FMLA leave paid under the FFCRA. This reimbursement also includes the employer’s share of Medicare tax and costs to maintain health insurance coverage for eligible employees during the leave period.
How do I get reimbursed?
The reimbursement is paid as a dollar-for-dollar tax offset against payroll taxes owed. Where an employer has paid more in COVID-19 related leave under the FFCRA than it owes in payroll taxes, the excess is treated as an overpayment, and the IRS will issue a refund. Employers must retain appropriate documentation in their records if they intend to claim tax credits for paid leave under the FFCRA.
In order to substantiate the claim for the credits, employers should retain the following records for at least four years after the date the tax becomes due or is paid:
- Employee’s written request for leave 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; and a statement that the employee is unable to work, including by means of telework, for such reason.
- If the leave request is based on a quarantine order or self-quarantine advice, the employee should provide the name of the governmental entity ordering quarantine or the health care professional advising self-quarantine. If the person subject to the order or advice is not the employee, that person’s name and relation to the employee should be included.
- If the leave request is based on school closing or child care provider unavailability, the employee should provide the name and age of the child(ren), name of the school or care provider, and a representation that no other person will be providing care for the child during the time of the paid leave. If the child(ren) in question is older than 14, the employee should identify special circumstances that require the employee to provide care.
- Documentation showing how the employer determined the amount of qualified leave paid.
- Documentation showing how the employer determined the amount of qualified health plan expenses that the employer allocated to wages.
- Form 941, Employer's Quarterly Federal Tax Return.
- Form 7200, Advance of Employer Credits Due To COVID-19, if applicable.
- Any other filings made to the IRS requesting the credit.
Eligible employers who pay qualifying leave can recoup this reimbursement immediately by retaining a portion of payroll taxes equal to the amount of qualifying leave they have paid. Employers can retain withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees. This allows employers to draw from payroll and income taxes withheld from or paid on behalf of all employees, not just those to whom paid leave is owed under the FFCRA.
Thus, businesses are able to immediately access funds reserved for payroll taxes to cover their costs of paying leave under the FFCRA. The IRS has acknowledged that because quarterly tax returns are not filed until after the qualified leave payments are made, some employers may not have sufficient funds set aside to fund their required leave payments.
If employers do not have sufficient funds to cover the cost of qualified paid leave owed to their employees, they can seek an expedited advance from the IRS. Employers can file for this advance by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19. The advance is only available if an employer has fully reduced its remaining federal employment tax deposits for wages paid in the same quarter to zero. The IRS expects to begin processing advance payment requests in April 2020.
In addition, under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), most employers will be able to delay payment of any employer-side Social Security taxes owed for the period from March 27, 2020, through December 31, 2020, with 50 percent of the deferred taxes due by December 31, 2021, and the other 50 percent due by December 31, 2022.
If an employer covered under the FFCRA owes the IRS $10,000 in payroll taxes, and the employer paid $7,000 in COVID-19 related qualified leave under the FFCRA, the employer could use $7,000 to make qualified leave payments to its employees. The employer would then owe $3,000 with its next scheduled payroll tax payment.
On the other hand, if the employer paid $12,000 in COVID-19 related leave under the FFCRA, the employer could use the full $10,000 to make qualified leave payments to its employees. The employer could then request an expedited advance from the IRS for the remaining $2,000.
If you have questions, contact your Fredrikson and Byron Employment & Labor attorney.