Payroll Tax Credit Recap

The U.S. Department of Labor issued its first official guidance for employers and workers about the paid-leave provisions in the Families First Coronavirus Response Act that was signed into law on March 18th. Per their guidance, these provisions will take effect on April 1, 2020.

Emergency Paid Sick Leave Credit

This credit provides for a 100% reimbursement of paid sick leave associated with this Act.

Qualified sick leave wages are required wages paid to employees with one of the following circumstances related to COVID-19:

1. The employee is subject to a Federal, State, or Local quarantine
2. The employee has been advised by a physician to self-quarantine
3. The employee is experiencing symptoms and seeking a medical diagnosis
4. The employee is caring for an individual who is subject to (1) and (2) above
5. The employee is caring for a child whose school or daycare has closed or the childcare provider is unavailable due to COVID-19 precautions

For qualified sick leave wages paid, the credit amount is as follows:

• Maximum of $511/day up to 10 days (maximum of $5,110 per employee) for employees described in (1), (2), or (3) above
• Maximum of $200/day up to 10 days (maximum credit of $2,000 per employee) for employees described in (4) or (5) above

The credit is increased for the employer’s share of medicare tax (1.45%) on qualified sick leave wages. In addition, the credit is increased for any health insurance coverage paid for eligible employees that is reasonably allocated to the number of days the employee is unable to work (up to 10 days).

Qualified sick leave wages are not subject to the employer portion of social security tax (6.2%). Wages paid to employees are subject to normal withholding requirements.

Self-employed individuals are eligible for this credit as well if they have a covered circumstance related to COVID-19. The credit is the lesser of $200/day or 67% of average daily self-employment income up to 10 days. The average daily self-employment income is determined by dividing total net earnings for the taxable year by 260.

To take advantage of these credits now, employers can adjust any required 941/943 tax deposit for the anticipated credits. The IRS provides the following example:

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 use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

Self-employed individuals can adjust quarterly estimated tax payments by the expected credit amount.

Paid Family and Medical Leave Credit

The new law provides employees with up to 12 weeks of job-protected paid leave if they need time off to care for a child whose school or daycare has closed. The first two weeks are unpaid, but the employee can seek relief through emergency paid sick leave discussed above. The Act provides for a 100% reimbursement of qualified family and medical leave wages paid pursuant to this Act.

The credit is limited to $200 per day up to 50 days for a maximum of $10,000 per employee.

Qualified family leave wages are not subject to the employer portion of social security tax (6.2%). The employer will receive an additional credit for medicare taxes paid on these wages. Additionally, health care coverage properly allocable to the qualified family leave wages can be added to the credit amount.

Self-employed individuals are eligible for this credit as well. The credit is the lesser of $200/day or 67% of average daily self-employment income up to 50 days. The average is determined by dividing total net earnings for the taxable year by 260.

Both of these payroll tax credits are set to expire on December 31, 2020.

We will provide further updates as guidance is issued.

Updated 3.25.2020 at 4:00 PM