David Mancuso, CPA
The Families FIrst Coronavirus Response Act's main focus is on two types of mandatory paid leave for employees and on tax credits to help employers pay for the mandatory paid leave.
There are different paid leave types and amounts based on the reasons that the employees are unable to work due to the COVID-19 emergency. Employers will need to make determinations of the amount and duration of mandatory paid sick leave based on an individual employee’s facts.
To help fund mandatory paid leave, employers will receive payroll tax credits against FICA based on the amounts of mandatory sick leave paid and based on certain qualified health plan expenses the employer incurs related to employees taking the mandatory paid leave.
Self-employed individuals who are unable to work because of the COVID-19 emergency will also receive credits against section 1402 Self Employment Contributions Act (SECA) contributions. If a self-employed individual is also an employee of another employer, the individual cannot receive both.
Definitions and requirements
- The mandatory paid leave rules generally apply to employers with fewer than 500 employees.
- Eligible employee
- An employee who has worked for the employer for at least 30 days.
- Employers can exclude health providers or emergency responders from the benefits above.
- Employers must give employees notice that these types of leave are available.
- Employees must be allowed to use the appropriate types of leave described above before taking any regular paid time off otherwise available to the employee.
- These paid leave rights expire at the end of 2020.
Mandatory paid leave types
Public health emergency leave/Family leave
Under amendments to the Family and Medical Leave Act (FMLA), if an employee takes time off (and is unable to work or telework) to care for a son or daughter under age 18 because the school or place of care has been closed due to the COVID-19 public health emergency, the employer must allow the employee to take time off.
This time off is unpaid job-protected leave for the first two weeks. During this two-week period, the employee can take other types of paid time off available from their employer or under the emergency paid sick leave, if eligible.
However, after the first 10 workdays, the employer must provide mandatory paid leave for each day of leave. The paid leave amount is:
- At minimum 2/3 of the employee’s regular rate of pay based on the employee’s normal work schedule.
- The amount is capped at $200 per day and is capped at a total of $10,000 for each employee (10 weeks in total).
- The employee’s job must remain protected while the employee is on leave unless a special exception applies.
Emergency paid sick leave
Employers must provide up to 80 hours of emergency paid sick leave to each full-time employee who cannot work (or telework) based on any of the six criteria below. Part-time employees get paid sick leave based on their hours during a normal two-week schedule.
The amount the employer must pay depends on the criteria in use:
- Employee is subject to federal, state or local quarantine restrictions.
- The employee has been advised by a health care provider to self-quarantine due to COVID-19 concerns.
- The employee has COVID-19 symptoms and is seeking a medical diagnosis.
- The employee is caring for someone under quarantine or self-quarantine as described above.
- The employee is caring for a son or daughter if the school or day care provider has been closed due to COVID-19 precautions.
- Other similar conditions if posted by the Department of Health and Human Services (HHS).
For circumstances 1 to 3 above, the amount of paid sick leave is:
- 100% of regular compensation up to a maximum amount of $511 per day.
For criteria 4 to 6 above, the amount of paid sick leave is:
- 2/3 of regular pay with a maximum amount of $200 per day.
Employers subject to multiemployer collective bargaining agreements may have to fulfill the requirements above by paying into multiemployer paid leave plans under the collective bargaining agreement.
Small Business Exemption
Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue.
The exemption will be available based on simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. The Department of Labor will provide emergency guidance and rulemaking to clearly articulate this standard.
Employer tax credits
The Act includes four new tax credits to help alleviate the cost to employers of the paid leave requirements described above. These tax credits are set forth in sections 7001 through 7004 of the Act.
Payroll credit for required paid sick leave
Employers can take tax credits for qualified sick leave wages actually paid in a quarter up to $200 per employee per day (or $511 per employee per day for the quarantine reasons listed above). The aggregate number of days of sick leave considered is limited to the aggregate number of days taken into account for all preceding quarters minus 10 days.
The credit cannot be greater than the payroll taxes for that quarter (reduced by certain other FICA credits) and applies only to wages paid for the period beginning on a date selected by Treasury during the 15-day period beginning on the date of enactment (March 18, 2020) and ending on Dec. 31, 2020.
An employer can increase the tax credit for certain qualified health plan expenses incurred by the employer to provide employee group health plan coverage while employees are on this paid leave. This only applies to employer group health plan coverage that is exempt from employee income under section 106 (regular exemption for employer-provided health care plans). This amount needs to be pro-rated based on the number of covered employees and is with regard to periods of coverage while the emergency paid sick leave is being used. Presumably, this is in place because the employer cannot take the employee’s usual pre-tax salary reductions typically used to pay for health insurance from emergency paid sick leave wages.
To avoid a double benefit, the employer’s gross income must be increased by the amount of the tax credit.
Credit for sick leave for certain self-employed individuals
A credit similar to the payroll credit for required paid sick leave described above is available for self-employed individuals. The credit is taken against section 1402 self-employment tax and the credit computation is substantially similar with some notable differences.
Payroll credit for required paid family leave
Like the required paid sick leave credit, an employer can take a tax credit against payroll amounts for each calendar quarter for required family leave payments. The credit is limited to $200 per day per employee covered with an aggregate credit limit of $10,000 per employee.
The employer can take a credit for the qualified group health plan expenses with regard to the employees taking paid family leave.
Credit for family leave for certain self-employed individuals
A credit similar to the payroll credit for required paid family leave described above is available for self-employed individuals. The credit computation is substantially similar with some notable differences.
Special rules related to tax on employers
Wages required to be paid because of emergency paid family leave are not considered wages for FICA purposes (however, the paid leave amounts are considered wages for Medicare purposes). The payroll credits (but not the self-employment credits) are increased by the amount of Medicare tax imposed on the employer.
Prompt Payment for the Cost of Providing Leave
The IRS issued IR-2020-57 which contains guidance on how to fund the new paid leave.
When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees' share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.
Under guidance that will be released this week, eligible employers who pay qualifying sick or child-care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child-care leave that they paid, rather than deposit them with the IRS.
The payroll taxes that are available for retention include 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.
If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced this week.
While necessary and very helpful to employees, the required paid leave provisions will be costly to employers and require additional resources to administer. The Act provides several tax credits to mitigate these additional employer costs; however, these tax credits are quite complex and bring forth many questions from employers that will need to be addressed. The biggest question now is when are these tax credits effective? The Act states that it applies to wages paid beginning on a date selected by Treasury, which could be any time in the next 15 days.
Department of Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the act. Under this policy, Department of Labor will not bring an enforcement action against any employer for violations of the act so long as the employer has acted reasonably and in good faith to comply with the act. The Department of Labor will instead focus on compliance assistance during the 30-day period.