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COVID-19 Relief Alert (updated) — Families First Coronavirus Response Act: Using Withheld Payroll Taxes To Pay For COVID-19 Employee Paid Leave

March 31, 2020

Please note that this alert was updated on March 31, 2020, and reflects additional information provided by the Department of Labor on or about March 26, 2020.

Background

On March 18, 2020, the Families First Coronavirus Response Act (the “Act”) was signed into law, providing paid sick leave and family and medical leave for employees affected by COVID-19.  We previously covered the obligations of employers to provide paid family and sick leave under the Act. 

The Treasury published a news release, IR-2020-57, describing the refundable payroll tax credits as “designed to immediately and fully reimburse” employers for providing the leave under the Act.  The Department of Labor also published a comprehensive set of Questions and Answers to provide compliance assistance to employers and employees, which provided additional guidance on the payroll tax credits. 

Payroll Tax Credit Basics

In the regular course of business, employers periodically withhold amounts from the paychecks of their employees for withheld federal income taxes, the employee’s share of Social Security taxes, and the employee’s share of Medicare taxes (“Payroll Taxes”).  Normally, employers pay Payroll Taxes to the IRS and file a quarterly payroll tax return. 

Under the Act, eligible employers paying for qualifying sick or family and medical leave would be eligible for a payroll tax credit – instead of paying over Payroll Taxes, an employer could retain (rather than pay to the IRS) an amount of Payroll Taxes to cover the cost of the paid leave.  The employer would claim such amount as a credit on its payroll tax return.  Such tax credits are available to employers with fewer than 500 employees. 

The payroll tax credit is refundable, meaning that if Payroll Taxes are insufficient to cover the cost of the paid leave, the employer may file a request for an accelerated payment from the IRS.  The IRS expects to process these requests in two weeks or less.

Employers can use the total Payroll Taxes withheld from all employees to pay for the qualified leave of affected employees.

Tax Credits Limited To Paid Leave Under the Act

It is important to note that only the costs of the paid leave that is required to be provided under the Act is eligible for such tax credit.  An employer may provide paid leave for its employees in excess of the Act’s requirements, but it will not be able to claim, and will not receive a tax credit for, amounts paid in excess of the Act’s limits.

Equivalent Tax Credit for Self-Employed Individuals

Equivalent sick leave and family and medical leave credit amounts will be available to self-employed individuals under similar circumstances.  Such credits will be claimed on their income tax returns and will reduce estimated tax payments (which are typically made quarterly).  

Required Documentation To Claim Tax Credit

An employer that intends to claim a tax credit under the Act for its payment of the sick leave or family and medical leave should retain appropriate documentation in its records. Such employer should consult IRS applicable forms, instructions, and information (both existing and forthcoming) for the procedures that must be followed to claim a tax credit, including any needed documents to support claiming the credit.

With respect to employees that take family and medical leave to care for their child whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19, an employer may require such employees to provide it with any additional documentation in support of such leave, to the extent permitted under the certification rules for conventional Family Medical Leave Act (FMLA) leave requests. For example, this could include a notice that has been posted on a government, school, or day care website, or published in a newspaper, or an email from an employee or official of the school, place of care, or child care provider.

Further Guidance

Further guidance on the Act’s leave programs and tax credit is expected in the form of implementing regulations and further compliance assistance, as warranted.

For questions about this and other COVID-19 tax developments, please contact TJ Wilkinson or Bob Canter at Shulman Rogers.

MORE INFORMATION

The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Tax Group.