IRS issues 66 FAQs for COVID-19-related tax credits
FAQs cover payroll tax credits for required paid leave
TAX ALERT |
The Families First Coronavirus Response Act (FFCRA) provides new mandatory paid sick leave and paid family leave for employees of employers with fewer than 500 employees. Starting April 1, 2020, an employer may be required to provide paid leave for employees affected by various the COVID-19 pandemic issues. Employers paying such mandatory leave to eligible employees are eligible for tax credits with regard to the special leave provisions.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, is designed to encourage Eligible Employers to keep employees on their payroll, despite experiencing economic hardship related to COVID-19, with an employee retention tax credit (Employee Retention Credit). The same wages cannot be counted for both credits.
On March 27, 2020, the IRS issued a questions and answers document (Q&A), discussing the tax credits and the employer and employee treatment of the mandatory paid leave provisions. The Department of Labor (DOL) also has a series of FAQs on its web site that started out as 14 Q&As and is now up to 79 Q&As as of this writing. This Tax Alert will focus only on IRS FAQs that are unique and not duplicated in the DOL FAQs. The RSM Tax Alert summarizing the DOL FAQs.
When to claim the credits (Q&A 2)
The tax credits for qualified COVID-19-related family or sick leave wages may be claimed by eligible employers for leave taken beginning April 1, 2020 and ending Dec. 31, 2020. The new Form 7200 may be used by eligible employers to claim any advanced refund of employer credits due to COVID-19. This includes the credits for paid sick leave and paid family leave under the FFCRA, and the Employee Retention Credit under the CARES Act.
How eligible employers can claim the credits (Q&A 12 – 15)
Expanded instructions on claiming these credits are specified, including information on how the credit is refundable and how the self-employed can claim similar benefits. These Q&As include helpful suggestions for eligible employers such as the ability to fund qualified leave wages with employment tax amounts that would otherwise be deposited with the IRS, and how to reduce the liabilities on the corresponding Form 941 for the applicable quarter.
Ability to reduce federal employment tax deposits without incurring penalties (Q&A 17)
An eligible employer may reduce their employment tax deposits by the qualified leave wages, and remove the otherwise applicable penalty under IRC 6656 for failure to make the required deposits if 1) the employer paid qualified wages to its employees in the calendar quarter before the deposit, 2) the amount of employment taxes not deposited is less than or equal to the expected tax credits and 3) the employer did not seek an advanced refund on Form 7200.
Interplay of the SBA Small Business Interruption Loan and the FFCRA tax credits (Q&A 19)
Any wages for which the employer receives tax credits for qualified leave wages are not includable in ‘payroll costs’ for the loan forgiveness under section 1106 of the CARES Act.
Qualified Sick Leave Wages (Q&A 20 – 24)
Qualified sick leave wages consist of up to 80 hours of taxable wages that the eligible employer must pay to an eligible employee because the employee is unable to work or telework because the employee:
- Is under a quarantine order related to COVID-19;
- Has been advised to self-quarantine due to COVID19 concerns;
- Is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
- Is caring for someone subject to a quarantine order or has been advised to self-quarantine due to COVID-19 concerns;
- Is caring for a child if the child’s school or child care location has been closed or the child care provider is unavailable due to COVID-19 precautions; or
- Is experiences other conditions specified by Health and Human Services in consultation with the IRS and Department of Labor.
Starting on April 1, the employee should be allowed to use Qualified Sick Leave before using the employee’s own paid time off, if the employee is an eligible employee.
Qualified Family Leave Wages (Q&A 25 – 30)
Qualified family leave wages are also taxable wages that an employer must pay to an eligible employee. The first 10 days of such leave are not ‘paid’ leave, but the employee can use other types of paid leave or may be eligible for the Qualified Sick Leave wages (if applicable). After the first 10 work days of unpaid qualified family leave, the employee may be able to use up to 10 weeks of paid family leave, if the conditions supporting this leave continue to apply.
Qualified family leave is payable if the employee is unable to work or telework because the employee needs to care for a child because the child’s school or place of care has been closed or the child care provider is unavailable, because of reasons related to COVID-19.
Qualified Health Care Tax Credit Amounts (Q&A 31 – 36)
If an Eligible Employer is paying Qualified Sick Leave or Qualified Family Leave, and the employer generally provides health care for the eligible employees, the tax credit for the qualified sick or family leave is increased by the Qualified Health Care plan expenses.
The amount of the Qualified Health Care plan expenses include the employer portion and the employee pre-tax portion of the health care insurance and also includes pre-tax contributions to a health Flexible Savings Plan or an employer HRA. In determining the Qualified Health Care expenses for FSAs or HRAs, the employer uses the amounts credited to that employee.
The Qualified Health Care credit does not include employer-provided HSA contributions.
The employer should use a reasonable allocation approach in determining the Qualified Heath Care amount allocated to a given employee who is taking Qualified Sick or Family Leave.
The Qualified Leave FAQs discusses methods for determining the value of the Qualified Health Care expenses. They provide separate guidance for self-funded and for insured plans.
- Insured group health plan - the employer uses the total plan expenses (employer plus pre-tax employee premium amounts. The employer can use one average premium rate, the COBRA rate(s), or a rate based on whether an employee is covered under self-only or other-than-self coverage.
- If the employer uses one average premium rate, the employer uses the total annual premium divided by the number of employees covered by the policy to find the ‘average annual premium per employee.”’ The employer then divides this by the average number of work days for covered employees (including paid leave as a work day) to get the average daily premium per employee.
- This resulting number is then allocated to each employee receiving the qualified sick or family leave.
- Self-insured group health plan – the employer can use any reasonable method to determine the plan expenses. Companies may use the plan’s usual COBRA premium or can use a reasonable actuarial method to estimate the annual expenses. The employer can then determine the allocated amount by dividing the annual expense by the number of covered employees. That amount is divided by the average number of work days during the years.
- The resulting amount is allocated to each day of qualified sick or family leave.
Employer substantiation of eligibility for tax credits (Q&A 44 – 46)
The IRS requires that (1) employees make any request for COVID-19-related paid sick leave or family medical act leave in writing and (2) that employers maintain records related to the employee’s request and the employer’s calculation of the credit for at least four years. The employee’s request must include:
- The employee’s name,
- The date or dates for which the employee is requesting leave,
- The COVID-19 related reason the employee is requesting leave and written support for such reason, and
- A statement that the employee is unable to work, including by means of telework, for the reason cited in the request.
The required support depends on the reason the employee is seeking covered leave.
- If the employee is requesting leave based on a quarantine order or upon self-quarantine advice, the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine. If the person subject to the quarantine order/recommendation is not the employee (e.g. the employee’s spouse), the employee must also provide the name of the person and their relationship to the employee.
- If the employee is requesting leave based on a school closing or child-care provider unavailability, the employee’s statement should include:
- The name and age of the child,
- The name of the school or child-care provider, and
- A representation that no other person will be providing care for the child during the period that the employee is requesting family medical leave. In addition, if the employee is unable to work or telework because of a need to provide care for a child older than 14 during daylight hours, a statement that special circumstances exist requiring the employee to provide care.
In addition to documentation indicated above provided by the employee to substantiate the need for covered-leave, employers are also need to create and maintain the following information/documents:
- Documentation to show how the employer determined the amount of qualified sick and family leave wages paid to employees that are eligible for the credit, including records of work, telework and qualified sick leave and qualified family leave.
- Documentation showing how the employer determined the amount of qualified health plan expenses that the employer allocated to wages.
- Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19 that the employer submitted to the IRS.
- Copies of the completed Forms 941 the employer submitted to the IRS. In the case of employers that use third party payers, the employer needs to maintain the records of information provided to the third party payer regarding the employer’s entitlement to the credit claimed on Form 941.
Special issues for employers: Tax treatment of credits (Q&A 49 – 52)
The full amount of credits for qualified leave wages, qualified health plan expenses and the employer’s share of Medicare tax are includable in the employer’s gross income. The employer may still deduct these amounts as an ordinary business expense, however the deduction for payment of social security taxes is reduced by the amount of tax credits claimed for qualified sick leave or qualified family leave under the FFCRA. Any wages taken into account for the qualified sick leave or qualified family leave credits under the FFCRA cannot be used in claiming a credit under the Family Medical Leave Act of section 45S.
Special issues for employers: Use of third-party payers (Q&A 53)
Third-party payers include professional employer organizations (PEO), certified professional employer organizations (CPEO) and agents as defined under section 3504. An Eligible Employer (also known as the common law employer) who is otherwise eligible to receive the credits, is entitled to the credits regardless of whether it uses a third-party payer to report and pay its federal employment taxes. The third party payer is not entitled to the credits with respect to the qualified sick leave and qualified family leave wages it remits on behalf of an Eligible Employer, regardless of whether the third-party payer is considered an ‘employer” or “co-employer’ for other purposes of the Internal Revenue Code.
Rules for claiming/reporting the credits will vary depending on the type of third-party payer the Eligible Employer uses.
- CPEO and a 3504 Agent – The CPEO or 3504 agent will report the credits for the Eligible Employer on its aggregate Form 941 and Schedule R, ‘Allocation Schedule for Aggregate Form 941 Filers’, that it already files. An Eligible Employer can submit its own federal Form 7200, ‘Advance of Employer Credits Due To COVID-19’, to claim the advance credit. The Eligible Employer will need to provide a copy of the federal Form 7200 to the CPEO or 3504 agent so the CPEO or 3504 agent can properly report the credit on its federal Form 941.
- PEO (also known as non-certified PEO) – the PEO will report the credits for the Eligible Employer on an aggregate federal Form 941 and separately report the credits allocable to the eligible employer for which it is filing federal Form 941 on an accompanying schedule R. The PEO does not have to complete Schedule R with regard to Eligible Employers for which it is not claiming a credit. The Eligible Employer will need to provide a copy of any Form 7200 that it submitted for an advance to the PEO so it can properly report the credit on the Form 941.
Special issues for employers: Other issues (Q&A 54 – 56)
Employee salary reduction for employer sponsored health plan, a 401(k) or other retirement plan, or any other benefits
The FFCRA does not distinguish between qualified sick leave and qualified family leave wages and other wages paid to an employee by an Eligible Employer. As such, the same withholding rules that generally apply to an employee’s regular wages would apply to qualified sick leave and qualified family leave wages. To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan for qualified sick leave and qualified family leave wages.
Employment tax withholding
Qualified sick leave and qualified family leave wages are wages subject to withholding of federal income tax including the employee’s share of social security and Medicare taxes. Qualified sick leave and qualified family leave wages are also considered wages for purposes of other benefits that the Eligible Employer provides, such as contributions to 401(k) plans.
Tax-exempt organizations that are required to provide paid qualified sick leave and qualified family leave may claim the tax credits.
Specific issues for employees (Q&A 57 – 59)
Employees of private companies, public companies, certain tax-exempt entities and some governmental entities, are entitled to paid qualified sick leave and qualified paid family leave under the FFCRA. Some small employers (with fewer than 50 employees) may not be fully subject to these mandatory paid leave requirements.
The IRS addresses several questions that have come up from employees with regard to these types of leave.
The qualified sick leave and qualified family leave amounts are taxable compensation. As compensation, these payments are subject to the usual payroll taxes (FICA and Medicare for most employees, Railroad Retirement Tax Act amounts for railroad employees). The employer must also withhold federal income tax (and state tax, if applicable) from the payments.
The qualified sick leave and family leave amounts are ’wages’ for most employee benefit deductions, including amounts employees elected to pay on a pre-tax basis (such as 401(k) elective deferrals, pre-tax health plan contributions, pre-tax Flexible Savings Account contributions) and amounts the employees pay for group life, disability, etc.
An employee may be able to receive both qualified sick leave and qualified family leave wages, but these types of leave are paid at different times, in different amounts and may be paid for different reasons.
An employer cannot treat these types of leave as excluded from taxable income under section 139.
Provisions related to self-employed individuals (Q&A 60 – 66)
Self-employed individuals are able to claim a tax credit as well. Self-employed individuals can claim credits equal to the leave benefit when they file their annual individual income tax return. The eligibility requirements for a self-employed individual are much the same as for an employee requesting sick or family medical leave.
A person can claim a qualified sick leave equivalent credit for periods of time that he or she is unable to work or telework because:
- They are subject to a Federal, State or local quarantine or isolation order related to COVID
- A health care provider has advised them to self-quarantine due to concerns related to COVID-19, or
- They are experiencing symptoms of COVID-19 and seeking a medical diagnosis.
For the three reasons above, the self-employed person is eligible for a credit of 100% of their average daily income capped at $511 per day for a maximum of 10 days.
A self-employed person is also eligible for a qualified sick leave equivalent amount because they are unable to work or telework because the individual:
- Is caring for an individual who is subject to a Federal, State or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19,
- Is caring for a child if the child’s school or place of care has been closed or child care provider is unavailable due to COVID-19 precautions or
- Is experiencing any other substantially similar condition that the Secretary of Health and Human Services specifies (in consultation with the Secretary of the Treasury and the Secretary of Labor),
For the credit for caring for another, the individual is eligible for a credit of the lesser of $200 or 67% of average daily income another for a maximum of 10 days.
In addition, a self-employed person can claim the qualified family leave equivalent amount for up to 50 days. The maximum credit amount is equal the number of qualified family-leave days multiplied by the lesser of $200 or their average daily self-employment income. The maximum total family-leave credit is $10,000 (50 days times $200 per day). The days the self-employed individual can take into account for this credit are the days for which that individual would be entitled to receive paid family leave if he or she was working for an employer subject to the sick and family leave requirements of the FFCRA.
- A person’s average daily self-employment income is an amount equal to their net earnings from self-employment for the taxable year divided by 260.
- The self-employed person claims the credit when they file their 2020 Form 1040, however, in order to advance fund the benefit, the person can take into account his or her credit entitlement when preparing their individual estimated tax payments for 2020.
- These credits for self-employed individuals are only allowable for days during the period starting on April 1, 2020 and ending on Dec. 31, 2020.
- A person who is both self-employed and employed by another can receive qualified sick and family leave wages from their employer, as well as sick and family leave equivalent credit amounts based on their self-employment income. However, there is an offset designed to prevent a taxpayer from double dipping.
To stay up to date on the latest information from RSM regarding the coronavirus public health emergency, visit our Coronavirus Resource Center.