What are the federal payroll tax credits involved with Coronavirus (“COVID-19”) related to Paid Sick and FMLA Leave?
Small and midsize employers with fewer than 500 employees can take advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing COVID-19 leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.
To take immediate advantage of the paid leave credits, businesses can retain and access funds they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form. Eligible employers will be able to claim these credits based on qualifying leave they provide between April 1 and Dec. 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.
General information about both types of leave can be found in Murphy Austin’s March 20th and March 26th updates, found here.
How are the Paid Sick and FMLA Leave credits obtained, and when will the funds come to an employer?
When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.
Under guidance to be released, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS. The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees. If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less.
Can you provide an example of the Paid Sick and FMLA Leave related tax credits?
If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could retain up to $5,000 of the $8,000 of taxes it was going to deposit. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date. If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000. For self-employed individuals, similar credits will be claimed on their income tax return and will reduce estimated tax payments.
What is the employee retention credit for employers subject to closure due to COVID-19?
Employers receive a refundable quarterly payroll tax credit equal to 50% of qualified wages paid to an employee. For purposes of the credit, up to $10,000 of wages per employee is taken into account. Excess credits are refundable. Eligible employers include employers (1) whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or (2) who have a 50% decrease in gross receipts for the same calendar quarter in the prior year. This credit does not apply to governmental employers. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.
Can an employer delay payment of employer payroll taxes?
Employers and self-employed taxpayers can delay payment of the employer portion of payroll taxes through the end of 2020. Fifty percent of any payroll taxes deferred under this provision must be paid by December 31, 2021, with the remaining fifty percent paid by December 31, 2022
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Jeffrey W. Curcio, Corporate, Business, and Tax Law Partner
916-446-2300, Ext. 3024
B.J. Susich, Corporate, Business, and Tax Law Partner
916.446.2300, Ext. 3002
Brian P. Bowen, Corporate, Business, and Tax Law Of Counsel
916.446.2300, Ext. 3132