IRS Issues Guidance Regarding FFCRA Tax Credits
On Wednesday, April 1, the Internal Revenue Service (IRS) issued guidance in the form of Frequently Asked Questions (FAQs) regarding the payroll tax credits available under the Families First Coronavirus Response Act (FFCRA). (To view the FAQs, click here). These FAQs, along with the Department of Labor’s (DOL) temporary regulations, were released just in time as the FFCRA went into effect on April 1, 2020. (For more information regarding the DOL’s temporary regulations, click here).
As background, eligible employers are entitled to fully refundable payroll tax credits for qualified sick leave wages and qualified family leave wages paid pursuant to the FFCRA. Eligible employers include businesses and tax-exempt organizations with fewer than 500 employees that are required to provide paid leave under the FFCRA. Governmental employers, including federal and state governments and the instrumentalities and agencies thereof, are not eligible for the tax credit.
The following highlights some of the key takeaways from the IRS’s FAQs:
Amount of the Credit
Eligible employers are entitled to a payroll tax credit equal to 100% of qualified sick leave wages and qualified family leave wages paid to eligible employees during a quarter beginning April 1, 2020, through December 31, 2020. The employer’s share of Social Security taxes (6.2%) does not apply to any qualified sick or family leave wages paid, but the employer’s share of Medicare taxes (1.45%) does apply to such qualified payments. The tax credit may, however, be increased by the employer’s share of Medicare taxes (1.45%) imposed on such qualified sick and family leave wages.
The credit may also be increased by any qualified health plan expenses, which are amounts paid or incurred by the employer to provide and maintain a group health plan, allocated to any qualified wages. Generally, qualified health plan expenses are properly allocated to the qualified sick or family leave wages if the allocation is made on a pro rata basis among covered employees (e.g., the average premium for all employees covered by a policy) and pro rata on the basis of the period of coverage (relative to the time periods of leave).
Example: Employer pays $10,000 in qualified sick leave wages and qualified family leave wages in Q2 of 2020. Employer does not owe the Employer’s share of Social Security taxes (6.2%) on the $10,000, but it will owe the Employer’s share of Medicare taxes (1.45%) on the payment ($145). Employer’s credits equal $10,145, which include the $10,000 in qualified leave wages, increased by the $145 for Medicare taxes. If the Employer had also incurred qualified health plan expenses allocable to the qualified wages, its credits would be increased by such amount.
Claiming the Credit
The tax credit is applied against the employer’s portion of Social Security taxes (6.2%). Employers may claim the credits on their quarterly federal employment tax returns (Form 941), or benefit from the credits more quickly by reducing their federal employment tax deposits.
The IRS recommends employers that pay qualified leave wages to retain the amount of all federal employment taxes equal to the amount of qualified wages paid (plus any allocable qualified health plan expenses and the employer’s share of Medicare tax imposed on those wages), in anticipation of claiming the credits on Form 941. The federal employment taxes available for retention include federal income taxes withheld from employees, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.
The IRS also published Notice 2020-22 which provides that an employer will not be subject to penalty for failing to deposit federal employment taxes relating to qualified leave wages in any quarter beginning April 1, 2020, through December 31, 2020.
If the amount of the federal employment taxes retained by the employer for qualified wages required under the FFCRA are not sufficient to cover such wages, the employer can file a request for an advance payment from the IRS using Form 7200, Advance Payment of Employer Credits due to COVID-19 (available here).
Before requesting an advance payment, however, an employer should reduce its remaining federal employment tax deposits for wages paid in the quarter to zero (as described above in “Claiming the Credits”). Then, if the reduction in deposits is not sufficient to cover the qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on such qualified leave wages), the eligible employer can file a Form 7200.
Substantiation and Record Retention
Employers claiming the credit must retain, for at least four (4) years, records and documentation related to and supporting each employee’s leave, including the following:
- The employee’s name;
- The date(s) for which qualifying leave is requested;
- A statement and written support of the COVID-19-related reason the employee is requesting leave;
- A statement from the employee that he or she is unable to work or telework for such COVID-19-related reason;
- If the COVID-19-related reason is based on a quarantine order or recommendation, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine and, if the employee isn’t the one quarantined, the person’s name and relation to the employee.
- If the COVID-19-related reason is because of a school or childcare closure, the statement from the employee should include the name and age of the child(ren) to be cared for, the name of the school or childcare center that was closed, and a representation that no other person will be providing care for the child during the applicable period. If the employee’s inability to work or telework is to provide care for a child older than age 14, the employee’s statement must include a statement related to the special circumstances that exist to require such care.
- Documentation to show how the employer determined the amount of wages paid to the employee;
- Documentation to show how the employer determined the amount of qualified health plan expenses allocated to qualified wages paid to the employee;
- Copies of any completed Forms 7200 the employer submitted to the IRS; and
- Copies of the completed Forms 941 the employer submitted to the IRS.
Taxation and Deductibility
Qualified sick leave wages and qualified family leave wages paid under the FFCRA are subject to withholding of federal income tax and the employee’s share of Social Security and Medicare taxes. Qualified leave wages are generally also considered wages for purposes of other employer-provided benefits, such as contributions to 401(k) plans (provided the plan does not explicitly exclude such payments from the definition of compensation).
An eligible employer’s payments of qualified leave wages under the FFCRA are deductible by the employer as ordinary and necessary business expenses in the tax year that the wages are paid or incurred.