The IRS has released guidance for employers and their payroll providers regarding the COVID-19-related tax credits for paid leaves under the Families First Coronavirus Response Act (FFCRA), specifically the Emergency Paid Sick Leave Act (EPSLA) and Emergency Family and Medical Leave Expansion Act (EFMLEA). This is a very detailed, 32-page document, and we encourage employers and their payroll providers to examine it carefully for information directly relevant to their respective organizations. Below, we summarized key provisions offering new guidance:
- Amount of tax credit: The credits cover 100% of the costs of qualified sick and family leave wages (amounts paid to employees in Emergency Paid Sick Leave and Emergency Family and Medical Leave) plus the employer’s share of Medicare tax on those wages (1.45%) plus “any qualified health plan expenses allocable to those wages.” Of note, an employer does not owe the employer’s share of Social Security taxes on the qualified sick leave wages. (Q6, 10)
- How to determine amount of qualified health plan expenses: An employer can choose one of 3 reasonable methods for allocating the health plan cost to each employee: 1) use to COBRA applicable premium (ER + EE portions only, without mark up for administration); 2) one average premium rate for all employees; or 2) “a substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage.” The FAQs provide detailed guidance on each method, and what can and cannot be included. (Q9, 31-36, 40-42)
- How the credit is claimed: Employers calculate the amount of the credit and apply it against quarterly tax payments on the Form 941 to reduce what they would otherwise owe. If the amount of quarterly taxes is not sufficient to cover the credit, the employer must complete a Form 7200 to request an advance refund. (Q12-14)
- Substantiating eligibility for tax credits: To support the tax credit claimed, an employer must retain the following: 1) documentation from the employee requesting leave (Q44); and 2) documentation of how the qualified sick and family leave wages and the allocable health plan expenses were calculated; 3) copies of the Forms 7200 and Forms 941 submitted to the IRS. (Q45-46) This documentation must be retained for four (4) years. (Q46) Employers should coordinate closely with their payroll providers, who normally submits Forms 941, and now, assumedly, Forms 7200 to the IRS on their behalf.
- Multiple credits and benefits: An eligible employer may claim tax credits for qualified leave wages under FFCRA, for the Employee Retention Credit under the CARES Act, and a Small Business Interruption Loan under the CARES Act. However, employers cannot receive double credits for the same qualified wages. (Q18-19)
- Tax treatment of paid sick and family leave wages: Such wages are taxable to the employee. (Q55,57)
- Non-profits are eligible for the credits (Q56)
The legal and HR team at Lake Effect is closely monitoring the impact of COVID-19 on the workplace. Keep watching for new blogs or subscribe to our mailing list for important legal updates and HR best practices. If you have any questions regarding our quick tips, the attorneys and HR professionals at Lake Effect HR & Law are ready and willing to help. Contact us at firstname.lastname@example.org or 1-844-333-5253.