Tax Update
March.24.2020
On March 18, 2020, the Families First Coronavirus Response Act (the “Act”) was signed into law. The Act covers a range of emergency relief items, from expanded paid family, medical and sick leave to coverage of COVID-19 testing. This Tax Alert will focus on new tax credits available to employers required to pay expanded family, medical and sick leave under the Act.[1]
Under this provision of the Act, an employer is allowed a credit against the Old-Age, Survivors, and Disability Insurance (“OASDI”)[2] tax imposed on the employer for each calendar quarter in an amount equal to 100% of the qualified sick leave wages paid by the employer with respect to that calendar quarter, subject to the limits described below. The provision defines qualified sick leave wages as wages and compensation paid by an employer with fewer than 500 employees which are required to be paid by reason of certain circumstances related to COVID-19 (employers with less than 50 employees can be exempt from this requirement):
The provision limits the amount of qualified sick leave wages that is taken into account with respect to an individual for purposes of the credit. In the case of paid sick time qualifying under clauses (1), (2), or (3) above, the amount of qualified sick leave wages taken into account for purposes of the credit may not exceed $511 for any day (or any portion thereof) for which the individual is paid such sick time. In the case of paid sick time qualifying under clauses (4), (5), or (6) above, the amount of qualified sick leave wages taken into account may not exceed $200 for any day (or portion thereof) for which the individual is paid such sick time. In addition, the provision provides that the aggregate number of days taken into account for the calendar quarter with respect to an individual under all clauses may not exceed the excess (if any) of 10 over the aggregate number of days so taken into account for all preceding calendar quarters.
The credit allowed is increased under the provision by so much of the employer’s qualified health plan expenses as are properly allocable to the qualified sick leave wages for which the credit is allowed. Qualified health plan expenses are amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent such amounts are excluded from the employees’ income as coverage under an accident or health plan. Except as otherwise provided by the Secretary of the Treasury, such allocations are treated as properly made under the provision if made on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate). The credit allowed may not exceed the OASDI tax imposed on the employer, reduced by any credits allowed for the employment of qualified veterans and research expenditures of qualified small businesses for that calendar quarter on the wages paid with respect to all the employer’s employees. However, if for any calendar quarter the amount of the credit exceeds the OASDI tax imposed on the employer, reduced as described in the prior sentence, such excess is treated as a refundable overpayment.
If an employer claims a credit under this provision, the amount so claimed is included in gross income. Thus, the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified sick leave wages, or deduction for health plan expenses (or any amount capitalizable to basis). For example, if an employer claims a credit of $5,510 for $5,110 of qualified sick leave wages and $400 of health plan expenses paid during the quarter, then the employer has an offsetting income inclusion amount of $5,510 and the employer may deduct $5,110 of qualified sick leave wages and $400 of health plan expenses (assuming such costs are not subject to capitalization). In addition, the employer’s income tax deduction for any tax imposed with respect to the employer’s share of OASDI tax for such quarter will not be reduced.
Any qualified sick leave wages taken into account under the provision are not taken into account for purposes of determining a credit under section 45S of the Internal Revenue Code of 1986, as amended (the “Code”). Thus, an employer may not claim a credit under section 45S with respect to the qualified sick leave wages paid, but may be able to take a credit under section 45S with respect to any additional wages paid, provided the requirements of section 45S are met with respect to the additional wages.
Under the provision, an employer may elect to have this provision not apply to such employer for a calendar quarter. The provision is effective on the date of enactment and applies for the period that begins on a date within 15 days of the date of enactment (March 18, 2020), as prescribed by the Secretary of the Treasury, and that ends on December 31, 2020.
Under this provision of the Act, an employer is allowed a credit against the OASDI tax imposed on the employer for each calendar quarter in an amount equal to 100% of the qualified family leave wages paid by the employer with respect to that calendar quarter, subject to the limits described below. The provision defines qualified family leave wages as wages and compensation paid by an employer with fewer than 500 employees by reason of an employee that is unable to work or telework due to a need for leave to care for a son or daughter under age 18 because the school or place of care has been closed, or the child care provider is unavailable, due to a public health emergency with respect to COVID-19 declared by a Federal, State, or local authority. Employers with less than 50 employees can be exempt from this requirement. An employer that is required to provide this additional family and medical leave is allowed a tax credit in respect of the leave.
The first 10 days of public health emergency leave required may consist of unpaid leave, after which paid leave is required. The paid leave is for the duration of the period, which is a maximum of 10 weeks. The amount of required paid leave under the provision is based on an amount not less than two-thirds of an employee’s regular rate of pay, and the number of hours the employee would otherwise be normally scheduled to work. Additional guidance is provided for employees with varying schedules. The paid leave mandated by the Act may not exceed $200 per day and $10,000 in the aggregate.
Under the provision, employers are allowed a credit against OASDI taxes in an amount equal to 100% of qualified family leave wages paid by the employer during the quarter. Qualified family leave wages for purposes of the credit means wages and compensation paid by an employer which were required to be paid pursuant to the Act. The maximum amount of qualified family leave wages eligible for the credit is $200 for any day (or portion thereof) for which the employee is paid qualified family leave wages, and in the aggregate with respect to all calendar quarters, $10,000. The credit is not allowed in respect of unpaid leave.
The credit allowed is increased under the provision by so much of the employer’s qualified health plan expenses as are properly allocable to the qualified family leave wages for which the credit is allowed. The provision defines qualified health plan expenses as amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent such amounts are excluded from the employees’ income as coverage under an accident or health plan. Except as otherwise provided by the Secretary of Treasury, allocations of qualified health plan expenses to qualified family leave wages are treated as properly made if made on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate).
The provision provides that the credit allowed may not exceed the OASDI tax imposed on the employer, reduced by any credits allowed for the employment of qualified veterans and research expenditures of qualified small businesses for that calendar quarter on the wages paid with respect to all of the employer’s employees. However, if for any calendar quarter the amount of the credit exceeds the OASDI tax imposed on the employer, reduced as described under the prior sentence, such excess is treated as a refundable overpayment.
If an employer claims a credit under this provision, the amount so claimed is included in gross income. Thus, the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified family leave wages, or deduction for health plan expenses (or any amount capitalizable to basis). For example, if an employer claims a credit of $2,700 for $2,500 of qualified family leave wages and $200 of health plan expenses paid during the quarter, then the employer will have an offsetting income inclusion amount of $2,700, and the employer may deduct $2,500 of qualified family leave wages and $200 of health plan expenses (assuming such costs are not subject to capitalization). In addition, the employer’s income tax deduction for any tax imposed with respect to the employer’s share of OASDI tax for such quarter will not be reduced.
Any wages taken into account in determining the credit under this provision are not taken into account for purposes of determining the credit under section 45S of the Code. Thus, the employer may not claim a credit under section 45S with respect to the qualified family leave wages paid, but may be able to take a credit under section 45S with respect to any additional wages paid, provided the requirements of section 45S are met with respect to the additional wages.
Under the provision an employer may elect to have the provision not apply to the employer for a calendar quarter. The provision is effective on the date of enactment and applies for the period that begins on a date within 15 days of the date of enactment, as prescribed by the Secretary of the Treasury, and that ends on December 31, 2020.
Under the Act, any wages or compensation required to be paid to employees by reason of the Act are not considered wages paid by the employer for purposes of FICA tax. As a result, no Federal employment taxes will be collected on such amounts from employers to be contributed to the OASDI. However, qualified family leave and qualified sick leave wages are wages to the employee that are subject to withholding of (1) Federal income tax and (2) the employee’s share of social security and Medicare taxes. Qualified family leave and qualified sick leave wages are also considered wages for purposes of other benefits that the employer provides, such as contributions to 401(k) plans.
The amount of the credit allowed by the Act is increased by the amount of Medicare tax imposed by the Code on qualified sick leave wages or qualified family leave wages allowed under the Act. Thus, employers must still pay over the employer’s share of Medicare taxes with respect to such qualified sick leave wages or qualified family leave wages, but they will receive a credit for such taxes paid. The no-double-benefit rule described above applies for purposes of this credit increase.
Although the requirements of this Act generally are only applicable to employers with 500 or fewer employees, larger employers may feel pressure to provide family, medical and sick leave benefits similar to those required by the Act. However, the Act will only provide payroll tax credits to smaller employers, without providing similar tax benefits to employers with more than 500 employees.
[1] This alert does not address similar tax benefits that are available to self-employed persons pursuant to the Act.
[2] Taxes imposed under the Federal Insurance Contributions Act (“FICA”) are comprised of two components: OASDI and Hospital Insurance (“Medicare”). With respect to OASDI taxes, the applicable rate is 12.4% with half (6.2%) imposed on the employee and the remainder imposed on the employer. The tax is assessed on covered wages up to the OASDI wage base ($137,700 in 2020).