The Families First Coronavirus Response Act (the “Act”) signed into law on March 18,2020 (Public Law No. 116-127) provides for, in addition to other relief, payroll tax credits for paid sick leave and paid family leave provided by employer under other provisions of the Act and equivalent credits against income tax for self-employed individuals.
Tax Credits for Employers
Employment Tax Credits for Qualified Sick Leave Wages
Pursuant to § 7001 of the Act, a credit is allowed each calendar quarter against the Old Age, Survivors, and Disability Insurance tax imposed by section 3111(a) of the Internal Revenue Code of 1986 (“IRC”) and the Tier 1 tax imposed on employers subject to the Railroad Retirement Tax Act under 3221(a) of the IRC (“Tier 1 Tax”), in each case in an amount equal to 100 percent of the “qualified sick leave wages” paid by an employer with respect to such calendar quarter.
“Qualified sick leave wages” include wages and compensation paid by an employer to satisfy the requirements of the Emergency Paid Sick Leave Act, subject to the following limitations:
- The credit is limited to $511 per day per individual for persons taking paid leave to care for themselves and $200 per day per individual for persons taking paid leave to care for others.
- The aggregate number of days that may be taken into account in calculating the credit for qualified sick leave wages paid to a single individual is limited to ten.
Pursuant to IRS release IR 2020-57 issued under the Act on March 20, 2020, the IRS will issue guidance the week of March 23rd to set forth guidelines under which eligible employers can retain (in lieu of making the required payroll tax deposits) an amount of the payroll taxes equal to the amount of qualified sick leave wages paid by such employers. The amount of the payroll taxes that can be retained will include: (1) withheld federal income taxes; and (2) both the employee share and employer share of Social Security and Medicare taxes for such affected employees.
The IRS will also issue guidance for employers to request an accelerated payment from the IRS if the employer does not have sufficient payroll taxes to cover the cost of the qualified sick leave wages.
Credits for Qualified Family Leave Wages
The Act affords employers a credit against OASDI and Tier 1 Tax, as applicable, each calendar quarter equal to one hundred percent of “qualified family leave wages” (meaning wages and compensation paid pursuant to the Emergency Family and Medical Leave Expansion Act) during such quarter. The credit is subject to a per-individual limit of $200 per day and $10,000 in the aggregate.
Both the sick leave and family leave credits describe above are increased by an amount equal to the Hospital Insurance tax imposed by Section 3111(b) of the IRC that would be due on qualified sick leave wages or qualified family leave wages with respect to which such credits are allowed.
Each credit will also be increased by so much of an employer’s “qualified health plan expenses” as are allocable (under rules to be prescribed by the Secretary of the Treasury) to, as applicable, qualified sick leave wages or qualified family leave wages with respect to which such credit is allowed. “Qualified health plan expenses” are defined by the Act to mean amounts paid or incurred by an employer to provide and maintain a group health plan (as defined by Section 5000(b)(1) of the IRC), to the extent such amounts are excluded from the gross income of employees under Section 106(b) of the IRC.
Generally Applicable Rules
The credits allowed to employers for any calendar quarter are refundable to the extent that they exceed an employer’s OASDI or Tier 1 Tax (as applicable) obligations for such quarter. Credits claimed by an employer for a calendar quarter will be includible in the employer’s gross income for the taxable year in which the quarter falls. In addition, any wages or compensation taken into account in calculating this credit may not be taken into account for purposes of determining the paid family and medical leave credit under Section 45S of the IRC.
Employers may elect to opt-out of the application of the credit on a quarter-by-quarter basis pursuant to rules to be promulgated by the Secretary of the Treasury.
Relief for Self-Employed Individuals
Self-employed individuals who regularly carry on a trade or business within the meaning of Section 1402 of the IRC may claim sick leave and family leave credits similar to those afforded to employers under the Act, which credits may be used to offset income taxes imposed on them by Subtitle A of the IRC. To qualify for any such credit, a self-employed individual must be in a position to qualify for, as relevant, paid sick leave under the Emergency Paid Sick Leave Act or paid family leave under the Emergency Family and Medical Leave Expansion Act, if he or she were an employee of an employer (rather than being self-employed).
Paid Sick Leave Credit Equivalent
The sick leave credit for a self-employed person for a taxable year will equal the number of days, up to an aggregate of ten for all taxable years, that the individual is unable to perform services in any trade or business described in Section 1402 of the IRC for a reason that would qualify him or her for paid sick leave under the Emergency Paid Sick Leave Act if he or she were an employee, multiplied by the lesser of:
- $511 if the individual is caring for himself or herself or $200 if caring for another; or
- 100% of the average daily self-employment income of the individual for the taxable year if the individual is caring for himself or herself or 67% if caring for another.
A self-employed individual’s average daily self-employment income for the purpose of the above-described limitations will be calculated as an individual’s net earnings from self-employment divided by 260.
If a self-employed individual receives paid sick leave or paid family leave under the Act as an employee of any employer in a taxable year, the self-employed sick leave credit will be reduced (but not below zero) dollar-for-dollar to the extent that the qualified sick leave wages received from the employer exceeds $5,110 if the leave is taken to care for oneself or $2,000 for leave taken to care for another.
Paid Family Leave Credit Equivalent
The credit self-employed individuals who would, if employees, qualify for paid family leave is calculated at a daily rate equal to the lesser of $200 or 67% of average daily self-employment income for the taxable year for up to a maximum of 50 days in a taxable year. The credit is reduced (but not below zero) dollar-for-dollar to the extent that a self-employed individual receives qualified paid family leave under the Act from an employer in an amount in excess of $10,000.
Applicable Period for Tax Credits
Each of the credits for employers and self-employed individuals will only be available for days falling within a period commencing on a date to be selected by the Secretary of the Treasury to be within fifteen days of enactment of the Act and ending on December 31, 2020.
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This alert does not purport to be a substitute for advice of counsel on specific matters.
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