FFCRA & Payroll Tax Credit: How Does it Work?Client Alert
The Families First Coronavirus Response Act (“FFCRA”) provides for refundable payroll tax credits for employers in order to assist with the cost of providing Coronavirus-related leave to their employees. These refundable payroll tax credits are designed to reimburse small and midsize employers for the cost of providing COVID-19-related leave to their employees. This tax credit goes into effect on April 1, 2020 and will remain in effect until December 31, 2020 unless extended or modified.
Who can utilize the tax credit?
The refundable credits are available to any eligible employer. An eligible employer is a business or tax-exempt organization with fewer than 500 employees who is required to provide emergency paid leave under the Emergency Family and Medical Leave Expansion Act (“EFMLEA”) or the Emergency Paid Sick Leave Act (“EPSLA”). Self-employed individuals also receive an equivalent credit.
What is the tax credit?
The FFCRA provides a refundable tax credit against the employer’s payroll tax deposit. The tax credits are equal to 100% of the amount an employer pays under the EFMLEA and the EPSLA up to a per employee cap.
Employers are limited to a refundable credit for wages paid pursuant to sick leave at two separate pay rates depending on the reason the person is unable to work. If the employee is unable to work because the employee has Coronavirus symptoms or is in a Coronavirus quarantine, whether a self-quarantine or not, the employer’s tax credit is capped at the employee’s regular pay rate, up to $511 per day, for up to 10 days, or $5,110 total aggregate per employee. If an employee is unable to work because the employee is caring for a family member with Coronavirus or caring for a child because of school or childcare facilities closing and the closing is related to COVID-19, the employer’s tax credit is capped at the employee’s regular pay rate, up to $200 per day, for up to 10 days, or $2,000 total aggregate per employee.
Example 1: An employee has Coronavirus symptoms and is seeking a medical diagnosis. The employee is a full-time employee with a pay rate of $30 per hour. The employee works 8 hours per day and is unable to work for 14 days. The employer would receive a tax credit of $2,400 (8 hours per day x $30 per hour x 10 days).
Example 2: Same situation as above, except the employee has a payrate of $40 per hour is unable to work because the employee must take care of a parent who has Coronavirus symptoms. In this example, the employer would receive a tax credit of $2,000 (10 days x $200 per day). The amount of credit is capped in this example because 2/3 of the employee’s regular rate of pay is more than $200 per day.
In addition to the refundable tax credits outlined above, the FFCRA also provides a refundable tax credit to employers for an employee who is unable to work because the employee must care for a child whose school or childcare facility is closed or whose childcare provider is unavailable due to the Coronavirus. In this situation, an employer may receive a refundable child care leave credit for up to 10 weeks of the employee’s qualifying leave. The refundable credit for child care leave is capped at the employee’s regular pay rate, or $200 per day, or $10,000 total aggregate per employee. Employers are also entitled to an additional credit based on the costs to maintain health insurance during the child care leave period.
How are the tax credits refundable?
All tax credits under FFCRA are refundable. That means if an employer’s payroll tax deposit is less than the total FFCRA tax credits, the employer would be eligible to file a request for an accelerated credit for the amount above the employer’s payroll tax deposit. The credit can be used to offset all federal income tax withholding from all employees (including those still working) and both the employer and employee portions of Social Security and Medicare taxes for all employees.
For example, an employer has $4,000 in total tax credits for all employees currently unable to work because of COVID-19. The employer prepares its payroll taxes and has a payroll tax deposit required of $3,000. The employer would use the entire $3,000 to pay the employees’ leave payments instead of depositing that amount with the IRS. The employer can then request the remaining $1,000 as an accelerated payment.
I am self-employed, how do I claim the credits?
A self-employed individual will claim these tax credits on his/her personal income tax return. The tax credits will reduce the individuals estimated tax payments.