Tax Credits for COVID-19 Related Benefits Paid To Employees

On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (FFCRA) into law. The Act provides paid emergency sick leave and expanded family and medical leave benefits for employees for COVID-19 related reasons.

Under FFCRA, employees can receive up to 80 hours of paid sick leave and expanded paid childcare leave when employees’ children’s schools are closed, or childcare providers are unavailable. While FFCRA applies to employers with 500 or fewer employees, small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or childcare unavailability where the requirements would jeopardize the ability of the business to continue. Lastly, these agencies have agreed to a 30-day non-enforcement period so long as it’s clear that good faith efforts to comply were made.

To help employers fund these additional employee costs, FFCRA also created payroll tax credits. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under FFCRA. The credits are designed to fully cover the costs of paying the leave benefits, as well as providing and maintaining group health plan coverage for the eligible employee during the leave period. Self-employed individuals are also eligible for equivalent credits.

Instead of businesses having to apply for the credit and wait for funds to be paid to them, they are permitted to keep certain funds withheld from employee compensation and reduce the amount of their own matching payroll tax remittance. Specifically, the employer can retain withheld federal income taxes, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes applying to all employees. Here are some examples provided by these agencies:

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.

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.

Additional details regarding these credits are scheduled to be released later this week.

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