Employers required to provide paid sick leave or paid family medical leave under the Families First Coronavirus Response Act are eligible for a refundable tax credit equal to 100 percent of qualified leave wages paid by the employer for each calendar quarter described above.
The tax credit for providing the required leave payments may be used to offset the employer’s portion of Social Security taxes due for each quarter through December 31, 2020. If the available credit for providing the required leave payments exceeds the amount of the employer’s Social Security tax obligation for a quarter, the employer may request a refund for the excess amount of the credit for the quarter. An employee with qualified leave wages may elect not to have the credit apply.
Source of funds
To mitigate cash flow concerns, the IRS announced guidance on March 20, 2020 [link that should allow employers to recover a significant portion of the cost of paid leave simultaneously with paying the leave in that payroll period. Specifically, guidance will be issued this week that will allow employers to retain employer payroll taxes equal to the amount of qualified leave wages paid instead of depositing them with the IRS each payroll period. In an expansion from the Act, the payroll taxes eligible for retention will include essentially all federal payroll tax deductions: the federal income tax withheld from all employee wages, the employer portion of Social Security and Medicare for that pay period and the Social Security and Medicare withheld from all employee wages for the pay period.
To better assist employers evaluate the value of the tax credits, provided below are some key considerations:
- Qualifying leave wages paid by an employer under the Act constitute Medicare wages for purposes of calculating the employer’s quarterly Medicare tax obligation but are not treated as wages for Social Security tax purposes.
- Employers must choose between claiming the tax credit or deducting the wages for federal tax purposes. It is not clear whether employers who later determine that a deduction in lieu of the credit would be better will be able reverse the credits and claim the deduction instead.
- The credit is claimed as part of an employer’s quarterly payroll tax reporting process.
- The Act requires Treasury to issue regulations waiving the payroll tax deposit penalties for employers who intend to claim the credit at the end of the quarter.
- It appears from the statue (but this may be clarified in regulation) that the tax credit refund may only be claimed after the end of each quarter. The IRS will process refunds for excess tax credits within two weeks of an employer’s request for a refund. It is unclear how often an employer may request a refund, but it appears requests may be permitted more frequently than quarterly.
While the tax credits provided under the Act are intended to largely offset the cost of providing the required sick leave and family medical leave, employers should look closely at the timing for recouping the credits from a cash flow perspective and plan accordingly. Further, employers should consider whether the credit or the deduction for the wages result in the greatest offset to the cost of providing the leave. In general, it would seem that the refundable tax credit would be better if the employer does not expect to be profitable in 2020.