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One of the key benefits to the Families First Coronavirus Response Act is the employer’s ability to promptly recover the amounts expended for paid leave under this Act through credits against certain payroll taxes and health plan benefits. The IRS has issued some specifics on how employers go about offsetting their tax liabilities for such expenses.
Important note: This information is a compilation of information publicly available from the IRS. It does not constitute legal tax advice and should you need further guidance on implementation or analysis of these issues, you should contact your CPA or a tax attorney.
Timing of claiming credits
Eligible employers will claim the credits on their federal employment tax returns (e.g., Form 941, Employer's Quarterly Federal Tax Return), but they can benefit more quickly from the credits by reducing their federal employment tax deposits. If there are insufficient federal employment taxes to cover the amount of the credits, an Eligible Employer may request an advance payment of the credits from the IRS by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19. The IRS stated that they expected to begin processing these requests in April 2020.
Amounts covered by the credit
The credits cover 100 percent of up to ten days of the qualified sick leave wages and up to ten weeks of the qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an eligible employer paid during a calendar quarter, plus the amount of the eligible employer’s share of Medicare taxes imposed on those wages. These are limited to the daily amounts and per employee caps under the FFCRA.
Example: An Eligible Employer pays $10,000 in qualified sick leave wages and qualified family leave wages in Q2 2020. Its credits equal $10,145, which include the $10,000 in qualified leave wages plus $145 for the eligible employer’s share of Medicare tax (this example does not include any qualified health plan expenses allocable to the qualified leave wages). This amount may be applied against any federal employment taxes that eligible employer is liable for on any wages paid in Q2 2020. Any excess over the federal employment tax liabilities is refunded in accord with normal procedures. An eligible employer must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid.
There is no credit for the employer portion of OASDI tax, also known as social security tax, that eligible employers are required to pay on the qualified leave wages because the qualified leave wages are not subject to this tax.
Health plan expenses
The amount of qualified health plan expenses taken into account in determining the credits generally includes both the portion of the cost paid by the eligible employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions. However, the qualified health plan expenses should not include amounts that the employee paid for with after-tax contributions.
An eligible employer who sponsors a fully-insured group health plan may use any reasonable method to determine and allocate the plan expenses, including (1) the COBRA applicable premium for the employee typically available from the insurer, (2) one average premium rate for all employees, or (3) a substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage.
An eligible employer who sponsors a self-insured group health plan may use any reasonable method to determine and allocate the plan expenses, including (1) the COBRA applicable premium for the employee typically available from the administrator, or (2) any reasonable actuarial method to determine the estimated annual expenses of the plan.
How to claim credits
Quarterly tax return
Eligible employers will report their total qualified leave wages and the related credits for each quarter on their federal employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return.
Reducing federal employment tax deposits
In anticipation of receiving the credits, eligible employers can fund qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages) by accessing federal employment taxes related to wages paid between April 1, 2020, and December 31, 2020 (for the same quarter), including withheld taxes, that would otherwise be required to be deposited with the IRS. This means that in anticipation of claiming the credits on the Form 941, eligible employers can retain the federal employment taxes that they otherwise would have deposited, including federal income tax withheld from all employees, the employees’ share of social security and Medicare taxes, and the eligible employer’s share of social security and Medicare taxes with respect to all employees. The Form 941 will provide instructions about how to reflect the reduced liabilities for the quarter related to the deposit schedule.
There is no penalty for nonpayment of depositing the reduced employment taxes provided the eligible employer does not claim an advance for the same portion of the anticipated credits it relied upon to reduce its deposits.
- If an eligible employer pays $5,000 in FFCRA 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 an eligible employer pays $10,000 in FFCRA sick leave and is otherwise required to deposit a lesser amount in taxes, (say $8,000), the employer could use the entire $8,000 of taxes in order to make qualified leave payments and could file a request for an accelerated credit for the remaining $2,000.
Requesting an advance if the federal employment taxes aren’t sufficient to cover the leave payment
Because quarterly returns are not filed until after qualified leave wages are required to be paid, some eligible employers may not have sufficient federal employment taxes set aside for deposit to the IRS to fund their required qualified leave wages. Accordingly, the IRS has a procedure for obtaining an advance of the refundable credits.
The eligible employer should first reduce its remaining federal employment tax deposits for wages paid in the same quarter to zero. If the permitted reduction in deposits does not equal the qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages), the eligible employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance credit for the remaining qualified leave wages (and any allocable qualified health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages) it has paid for the quarter for which it did not have sufficient federal employment tax deposits.
If an eligible employer fully reduces its required deposits of federal employment taxes otherwise due on wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and it has not paid qualified leave wages (and any allocable qualified health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages) in excess of this amount, it should not file the Form 7200. If it files the Form 7200, it will need to reconcile this advance credit and its deposits with the qualified leave wages on Form 941 (or other applicable federal employment tax return such as Form 944 or Form CT-1), and it may have an underpayment of federal employment taxes for the quarter. Form 7200 should be faxed to (855) 248-0552.
Refundable aspect of credits
If for any calendar quarter the amount of the credits the eligible employer is entitled to exceeds the employer portion of the social security tax on all wages (or the employer portion of the social security tax and Medicare tax on all compensation for employers subject to RRTA) paid to all employees, then the excess is treated as an overpayment and refunded to the eligible employer under sections 6402(a) or 6413(a) of the Internal Revenue Code.
Consistent with its treatment as an overpayment, the excess will be applied to offset any remaining tax liability on the Form 941, Employer’s Quarterly Federal Tax Return, and the amount of any remaining excess will be reflected as an overpayment on the Form 941. Like other overpayments of federal taxes, the overpayment will be subject to offset under section 6402(a) of the Code prior to being refunded to the employer.
How to Substantiate Paid Leave
An eligible employer must substantiate eligibility for the sick leave or family leave credits by creating and maintaining records that include the following information:
- The employee request for leave that contains all of the specifics required by the FFCRA for such request—specifically:
- The employee’s name;
- The date or dates for which leave is requested;
- A statement of 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 such reason.
- In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.
- In the case of a leave request based on a school closing or child care provider unavailability, the statement from the employee should include the name and age of the child (or children) to be cared for, the name of the school that has closed or place of care that is unavailable, and a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.
- 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 to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages. See FAQs 31 to 36 (“Determining the Amount of Allocable Qualified Health Plan Expenses”) at the IRS website listed above for methods to compute this allocation.
- 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, Employer’s Quarterly Federal Tax Return, that the employer submitted to the IRS (or, for employers that use third party payers to meet their employment tax obligations, records of information provided to the third party payer regarding the employer’s entitlement to the credit claimed on Form 941).
An Eligible Employer should keep all records of employment taxes for at least 4 years after the date the tax becomes due or is paid, whichever comes later. These should be available for IRS review.
Note that the paid leave amounts paid to employees are treated the same as wages so the employee is free to apply amounts to other benefits such as 401k, health plan, etc. as they normally would. Further guidance as to specific cases is available through the IRS. Once again, employers should consult with their tax experts for additional information about these tax credits.