IRS Issues Key Guidance Regarding Families First Coronavirus Response Act Tax Credits

Clark Hill PLC

In response to the current Coronavirus pandemic, on March 18, 2020, the U.S. Congress passed, and President Trump signed into law, the Families First Coronavirus Response Act (the “Act”).  Critically, the Act expands the FMLA through the Emergency Family and Medical Leave Expansion Act (“EFMLA”) and provides for paid sick leave for eligible employees through the Emergency Paid Sick Leave Act (“EPLSA”).  For more detailed information on these provisions, please take a moment to read our prior guidance on the topic: "The Families First Coronavirus Response Act: FMLA Expansions and Paid Sick Leave Extensions."

In funding these new benefits, the Act provides that employers may take a 100% tax credit (up to the daily/aggregate caps) against employer-side FICA and Medicare taxes.  The IRS also issued guidance regarding its planned regulations implementing the Act’s tax credit provisions.

The IRS’s planned regulations will allow employers to immediately retain withheld federal income taxes, the employee’s portion of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes relating to all employees in order to reimburse themselves for EPSLA and EFMLA benefits paid and costs to maintain health insurance coverage during EPSLA or EFMLA leave.  For example:

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If there are insufficient payroll taxes to cover EPSLA and EFMLA benefits, employers will be able to file a request for accelerated tax credit payments with the IRS.  The IRS states that it will be able to process these requests in two weeks or less.  For example:

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

The IRS’s planned regulations expand upon the Act text in two key respects: (1) the scope of taxes subject to the Act’s tax credit are expanded beyond just the employer portion of FICA and Medicare and (2) the tax credit may also be used to offset the costs of maintaining employee health insurance during EPSLA or EFMLA leave.

Finally, IRS states that its regulations will allow self-employed individuals to take tax credits by claiming these amounts on their tax returns.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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