On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (“FFCRA”). The FFCRA becomes effective no later than April 2, 2020. In addition to the additional categories of family leave and sick leave permitted under the Family Medical Leave Act (FMLA), the FFCRA creates some temporary but important tax credits. (A discussion about the family leave and sick leave provisions under the FFCRA can be found here: “Practical Considerations for Employers Dealing with COVID-19 Related Illness and Shutdown“.) The two primary credits available under the FFCRA are with respect to certain sick leave and family leave wages paid by an “employer”. Under the FFCRA, an employer is generally any employer with 500 or fewer employees. This is a departure from the standard FMLA definition, which makes reference to 50 or more employees. Furthermore, the term “wages” means hourly wages and salaries- – not bonuses or other irregular pay.
Tax Credit for Paid Sick Leave.
Under the FFCRA, there is now a credit against the FICA (Social Security) and Medicare components of an employer’s portion of the payroll tax (which is a 7.65% tax on all wages paid by the employer (ignoring Social Security tax phase-outs)) for each calendar quarter in an amount that is equal to 100% of the “qualified sick leave wages” paid by such employer during such calendar quarter (referred to in this discussion as the “Sick Leave Credit”), subject to certain limitations. For example, ignoring the limitations described below, Employer pays $1,000,000 in wages to all of its employees during a calendar quarter. Employer’s FICA and Medicare portion of the payroll tax is 7.65% x $1,000,000 = $76,500. Of the $1,000,000 in total wages paid by Employer during such quarter, $50,000 was qualified sick leave wages paid to employees who took COVID-19-related sick leave. Under the FFCRA, Employer’s $76,500 payroll tax obligation is reduced by $50,000 to $26,500.
The Sick Leave Credit can only be taken with respect to that portion of wages that do not exceed $511 per day for each employee who takes sick leave to care for himself or herself (described herein as “Category A”), or $200 per day for each employee who takes sick leave to care for an individual who is quarantined or showing symptoms of COVID-19 or a minor child whose school is closed (described herein as “Category B”). These per diem limits are the “qualified sick leave wages”. To be clear, the Sick Leave Credit does not become entirely unavailable if qualified sick leave wages exceed those limits. Instead, the Sick Leave Credit is available on the first $511 (Category A) or $200 daily wages (Category B), as applicable. It is important to again note that the Sick Leave Credit can only be taken to the extent that “qualified sick leave wages” are actually paid. The Sick Leave Credit is not available for amounts paid to employees who take sick leave that is unrelated to the COVID-19 outbreak. Additionally, no credit is available under the FFCRA for wages paid to employees who take vacation or other paid-time off.
The FFCRA imposes limitations on the number of days that can be taken into account when calculating the Sick Leave Credit. The aggregate number of days that can be considered during any calendar quarter is the higher of (a) the aggregate number of days taken into account for all preceding calendar quarters, or (b) 10 days. Since the FFCRA will likely not become effective the second day of the second quarter of 2020, the maximum number of days for the second quarter of 2020 will be 10 (because the aggregate number of qualifying sick leave days in all previous quarters is zero). Thus, the maximum credit available to an employer during the second quarter of 2020 will be $5,110 (Category A), and $2,000 (Category B).
If the amount of the Sick Leave Credit exceeds in each calendar quarter a sum equal to 7.65% of the wages paid with respect to the employment of all employees of the employer, the excess is treated as an overpayment that will be refunded.
The Sick Leave Credit will be increased by so much of the employer’s qualified health plan expenses as are properly allocable to the qualified sick leave wages. The term ‘‘qualified health plan expenses’’ means amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent that such amounts are excluded from the gross income of employees.
The amount of the Sick Leave Credit taken by an employer will be added to the employer’s taxable income for the year. For many employers this addition to taxable income has the effect of reducing the overall benefit of the Sick Leave Credit.
Payroll Tax Credit for Paid Family Leave.
Subject to the limitations discussed below, the FFCRA also allows a credit against the FICA and Medicare portion of an employer’s portion of the payroll tax for each calendar quarter equal to 100% of the “qualified family leave wages” paid by such employer during such calendar quarter (the “Family Leave Credit”). The Family Leave Credit is limited to $200 of qualified family leave wages per day paid to each employee who takes qualified family medical leave, or a total of $10,000 with respect to each such employee. The $10,000 limit is an aggregate limit, and not a per-calendar-quarter limit. Like with the Sick Leave Credit, the Family Leave Credit is refundable if it exceeds the amount of the FICA and Medicare portion of the payroll tax owed by the employer.
Like with the Sick Leave Credit, the Family Leave Credit will be increased by so much of the employer’s qualified health plan expenses as are properly allocable to the qualified family leave wages. And like with the Sick Leave Credit, the amount of the Family Leave Credit taken by the employer will be added to the employer’s gross taxable income for the year.
What About Self-Employed Individuals? The FFCRA did not forget about self-employed individuals. The Sick Leave Credit and Family Leave Credit are each available to the self-employed. In the case of an eligible self-employed individual, there is a credit against such individual’s income for any taxable year in an amount equal to the “qualified sick leave equivalent amount” or “qualified family leave equivalent amount”, as applicable. The term ‘‘eligible self-employed individual’’ means an individual who regularly carries on any trade or business (as defined in the Internal Revenue Code), and (2) would be entitled to receive qualified sick leave wages or qualified family leave wages if the individual were an employee of an employer (other than himself or herself).
The ‘‘qualified sick leave equivalent amount’’ and “qualified family leave equivalent amount” is each determined by different formulas set forth in the FFCRA. The amounts are generally the lesser of (a) the number of days of leave multiplied by the applicable dollar limitations described above, or (b) a certain percentage of the individual’s self-employment income.
Any Other Employer Benefits? The FFCRA includes a provision that any sick leave wages and family leave wages required to be paid by the FFCRA will not be considered wages subject to FICA and Medicare. Thus, in addition to receiving tax credits for such wages paid, an employer is not required pay the FICA and Medicare portion of the payroll tax with respect to such wages (7.65%).
What’s Next? The Secretary of the Treasury is instructed by the FFCRA to prescribe regulations with respect to the matters described above. Therefore, further guidance should be coming soon. Unless Congress enacts an extension, the FFCRA expires on December 31, 2020, so the credits described herein will only apply to qualified sick leave wages and qualified family leave wages paid during 2020.
If you have any questions about the FFCRA or the specific tax credits available under the FFCRA, please contact your attorney at Carlile Patchen and Murphy or any member of the Business Law Group or the Tax Law Group.