Tax credits ease cost of extension of paid sick leave and FMLA
Two core elements of the Families First Coronavirus Response Act (FFCRA) that was signed into law on March 18 were the extension of paid sick leave benefits and Family Medical Leave Act (FMLA) benefits to employees affected by the COVID-19 outbreak working for employers with fewer than 500 employees and government employees. For more details on these benefits, click here.
With many employers and self-employed individuals already feeling the financial effects on their businesses from social distancing and mandatory closures, the FFCRA includes provisions to help reduce the cost of these expanded benefits on affected employers though refundable tax credits.
Availability of tax credits Employers will be allowed a credit against the employer portion of Social Security taxes and the hospital insurance portion of FICA. Self-employed individuals (like sole proprietors or partners of businesses taxed as partnerships) will be allowed a credit against their income taxes. These tax credits are only available for sick pay and FMLA wages payable by reason of the FFCRA and will apply to payments made to employees from and after a date that is within 15 days of the date of enactment of the FFCRA as determined by the Secretary of the Treasury. As described below, there are important limitations of the amount of these credits and the situations in which they apply.
These tax credits are refundable to the extent they exceed the employer’s quarterly Social Security and hospital insurance taxes due or the self-employed individual’s income taxes due.
Payroll credit for paid sick leave and FMLA - The tax credit for employers is subject to the following limitations:
- Sick pay for self-care - The FFCRA provides for paid sick pay at the employee’s full regular rate for an employee who must self-isolate, obtain a diagnosis or comply with a self-isolation recommendation for COVID-19 (collectively, “self-care”). The tax credit for sick pay for self-care is capped for each employee at $511 per day for up to 10 days of paid sick leave.
- Sick pay for family care - The FFCRA provides for paid sick pay at two-thirds of the employee’s regular rate for an employee who takes time to care for a family member who must self-isolate, obtain a diagnosis or comply with a self-isolation recommendation for COVID-19 or to care for a child whose school has been closed or whose child-care provider is unavailable due to COVID-19 (collectively, “family care”). The tax credit for sick pay for family care is capped for each employee at $200 per day for up to 10 days of paid sick leave.
- FMLA payments -The FFCRA provides for up to 12 weeks of job-protected leave for employees who have been on the job at least 30 days to be used to adhere to a requirement or recommendation to quarantine due to exposure to or symptoms of COVID-19 (collectively, “quarantine”), to care for an at-risk family member subject to quarantine and to care for child whose school has been closed or whose child-care provider is unavailable due to COVID-19. The tax credit for FMLA wages paid under the FFCRA is capped for each employee at $200 per day and $10,000 for all calendar quarters.
- Increase for health plan expenses - The tax credits for sick pay and FMLA payments are increased by the amount of health care plan expenses paid by the employer for the employee allocable to the days of missed work if those health plan payments are not includable in the employee’s wages. The IRS will issue guidance on how to calculate the allocable expense, but the FFCRA allows employers to make this calculation on a pro rata basis for all covered employees and based on the number of days off from work relative to the number of days in the health care plan coverage period.
- No double dipping - Employers are not required to claim these tax credits, but if they do, then the wages included in calculating the credits may not be deducted. Similarly, employers claiming a credit under Internal Revenue Code Section 45S for certain wages paid may not include those wages in calculating the FFCRA credits.
Income tax credit for self-employed individuals - Self-employed individuals usually must include an amount equal to both the employer and employee portions of the Social Security Tax in their net income from self-employment when calculating their income taxes each year. The FFCRA allows a credit against a self-employed individual’s income taxes subject to the following limitations and requirements:
- Sick pay for self-care - Self-employed individuals may claim a tax credit for each day of work taken off for self-care equal to the lesser of $511 per day or the individual’s net earnings from self-employment income for the taxable year divided by 260 (the “average daily amount.”)
- Sick pay for family care - Self-employed individuals may claim a tax credit for each day of work taken off for family care up to the lesser of $200 per day or the two-thirds of the average daily amount.
- FMLA payments - Self-employed individuals may claim a tax credit for time taken off that would qualify for FMLA leave under the FFCRA if the individual was an employee of an employer other than himself or herself (see description above) equal to the lesser of $200 per day or two-thirds of the average daily amount.
- No double dipping - A self-employed individual’s average daily amount for a day is reduced for any amount that the individual receives as sick pay or FMLA wages from another employer for that day.
Documentation - Self-employed individuals must maintain documentation to support their eligibility for these tax credits and the IRS is supposed to issue guidance on this requirement