EMPLOYER TAX CREDITS FOR PAID SICK LEAVE AND FAMILY AND MEDICAL LEAVE
The Families First Coronavirus Response Act (FFCRA) was signed into law on March 18, 2020. It provides businesses with tax credits to cover some of the cost for employees who had to miss work (and were unable to work remotely) due to a COVID-19 diagnosis, exposure to COVID-19, or needing to care for a child whose school was not meeting in person. The credits are for periods of absence from April 1, 2020 through March 31, 2021 and are claimed on the employer’s Form 941. Employers with fewer than 500 employees qualify. Wages used for PPP loan forgiveness or for the employee retention credit are not allowed to also be used for this credit.
The credit can be claimed for the wages, health insurance costs related to the missed time, and the employer’s portion of Medicare tax. In addition, the employer’s portion of social security is not charged on the wages qualifying for the credit. The credit is refundable if all of the payroll taxes have already been deposited.
Sick Leave Wages Sick leave wages are amounts paid to employees who missed work due to (1) a federal, state, or local quarantine or isolation order related to COVID-19, (2) being advised by a health care provider to self-quarantine due to COVID-19 concerns, or (3) experiencing symptoms of COVID-19 and seeking a medical diagnosis. For full-time employees, credit can be received for wages paid on up to 80 hours of sick time. For part-time employees, the maximum hours are pro-rated based on the number of hours the part-time employee normally works in a two-week period. The maximum amount of wages per employee that can be claimed for the credit is $511 per day, or a total of $5,110.
Qualified Family Leave Wages Qualified family leave wages are amounts paid to employees who missed work due to (1) caring for an individual subject to quarantine for COVID-19 or who has been advised by a health care provider to self-quarantine due to COVID-19 concerns, (2) caring for their child if the child’s school or childcare provider is closed or unavailable due to COVID-19 concerns, or (3) experiencing any other substantially similar conditions. The first two weeks of these wages (or for a part-time employee a pro-rated number of hours calculated the same as for sick leave wages) are considered sick leave wages and are paid at 2/3 of the employee’s normal pay. The maximum amount of wages per employee for claiming this portion of the credit is $200 per day, or a total of $2,000. After the first two weeks, the qualified family leave wages kick in for the next 10 weeks. The credit is still capped at 2/3 of the employee’s normal pay at a maximum of $200 per day, or $10,000 for the 10 week period.
The employee is required to provide the employer with a written request for the leave. The notice should include: 1. The employee’s name; 2. The date or dates for which leave is requested; 3. A statement of the COVID-19 related reason they are requesting leave and written support for the reason (doesn’t require the COVID-19 test result or the healthcare provider’s note; the name of the government entity and a brief description of the directive is sufficient); 4. A statement that the employee is unable to work, including by means of telework, due to the COVID-19 related reason. An employer may require additional documentation at its discretion.
The employer must keep the requests received from the employees, calculations of the sick leave pay and family leave pay, calculations of the health care plan expense qualifying for the credit, and copies of the Form 941. These records must be kept for at least 4 years after the date the tax was due or paid.
The amount of sick leave or qualified family leave wages paid are to be reported on the employee’s W-2 either in box 14 or on a separate statement attached to the W-2. If both sick leave and qualified family leave are paid to the same employee, they should be reported as separate amounts. There is also a notice to be furnished to employees who receive these types of pay. IRS Notice 2020-54 includes model language that can be used.
The credit received by the employer is to be included in gross income for income tax purposes.
A self-employed individual and a partner in a partnership carrying on a trade or business are also eligible to claim the credits. Their credits are reported on Form 1040 and are calculated using a new Form 7202. The same qualifications as for sick leave wages and family leave wages are used for self-employed individuals and partners. But instead of wages, average daily self-employment income is used to calculate the credit. Average daily self-employment income is annual net earnings from self-employment divided by 260. Either the current year or the prior year’s annual self-employment net earnings can be used. The limits are the same as for wages – $511 per day with a maximum of $5,110 for sick leave, and for family leave $200 per day with a maximum of $2,000 + $200 per day with a maximum of $10,000. These credits are not included in the gross income of the self-employed person or partner. The documentation to be maintained is similar to that of an employer.