Businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick and childcare leave through December 31, 2020, under the Families First Coronavirus Response Act (FFCRA), can claim a refundable federal tax credit to recover 100% of those payments. The IRS also said that the cost of providing such leave can include the cost of continuing health care coverage during the federally mandated sick and childcare leave period.
IRS Information Release (IR) 2020-57 (March 20, 2020) outlines the system that will promptly reimburse employers for the benefits required under the Act.
Employers can deduct the cost of providing such leave from their total federal tax deposit amount from all employees (not just from those who take the federally mandated leave). Specifically, employers can deduct the cost of providing such leave from: (1) federal income taxes withheld from all employees’ pay; (2) the employees’ share of Social Security and Medicare taxes; and (3) the employer’s share of Social Security and Medicare taxes.
Equivalent tax credits are available to self-employed individuals for federally mandated paid sick and childcare leave. But self-employed individuals will deduct their tax credits from their estimated tax payments or can claim a refund on their federal income tax return (i.e., their 2020 Form 1040).
As a result, employers (including self-employed individuals) will have more cash in-hand (by not remitting taxes that are otherwise due) to cover the cost of providing the federal paid sick and childcare leave.
If the payroll tax off-set is not enough to cover 100% of those costs, employers can request a refund of their tax credit for any remaining amount. The IRS expects to process such refunds within two weeks.
Under the FFCRA, an employee qualifies for paid sick time if the employee is unable to work (or unable to telework) due to a need for leave because the employee:
Related article on this topic: Employer Requirements for Federal Paid Sick Leave and FMLA.
Additional insights related to the business impact of COVID-19 can be found here. If you have any questions or would like guidance for your specific situation, please contact Terry Bush, SPHR, or Adam Schwelnus, CPA, CGMA.