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A guide to employer tax credits in FFCRA and the CARES Act

by Scott Langer on April 17, 2020

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You’ve probably weathered many changes to your company and staffing recently. And that includes staying compliant with new legislation that requires expanded paid leave. There’s a lot of detail to keep track of, but the good news is many employers are eligible for some relief in the form of tax credits. Here’s what you need to know.

FFCRA paid leave requirements

The Families First Corona Virus Response Act (FFCRA) was passed March 18, 2020 and is effective April 1 to December 31, 2020. Among other provisions, it includes a requirement that employees be given expanded access to paid sick and FMLA leave (in certain circumstances).

Key FFCRA provisions:

  • Paid leave requirements apply to companies with fewer than 500 employees.
  • The employee must have been employed by the company for at least 30 days prior to taking leave.
  • Employees are given up to 80 hours of emergency paid sick leave at full pay up to $511.00 per day or $5110.00 maximum.
    • Employees earn 2/3 pay if they are caring for another person, up to $200.00 per day or $2,000.00 maximum.
    • Part-time employees are eligible for the same number of leave hours as they work on average in a two-week period.
  • Under the Emergency Family and Medical Leave Expansion Act, employees who take leave to care for a child whose school or childcare provider has closed due to COVID-19 reasons are given up to 12 additional weeks of FMLA (two unpaid and 10 paid). Paid FMLA leave is at 2/3 pay, up to $200.00 per day or $10,000.00 maximum.
    • If you are taking expanded family and medical leave, you may take paid sick leave for the first two weeks of that leave period, or you may substitute any accrued vacation leave, personal leave, or medical or sick leave you have under your employer’s policy, according to the DOL .

Paid leave may be taken for qualifying emergency time off under these circumstances:

  • The employee has a current COVID-19 diagnosis.
  • The employee is in self-imposed quarantine, or quarantine imposed by a health care provider, a government order, or the employer.
  • The employee is caring for another person diagnosed with COVID-19 or a person who is quarantined due to COVID-19.
  • The employee is caring for a child or other person who cannot care for themselves due to a school closing, child care closing, or other care program closure.

Small businesses, defined as those with fewer than 50 employees, may be eligible for an exemption to one of the paid leave requirements. National Law Review explains the exemption only applies to the obligation to provide paid leave due to school or childcare closures. A business must determine that providing leave to care for a child would jeopardize the viability of the business for one of the three following reasons:

  • The paid leave expenses would exceed the business’s ability to pay and cause them to “cease operating at minimal capacity.”
  • The employee’s taking leave would create a substantial risk to the financial health or operation of the company because of their specialized skills, knowledge, or responsibilities
  • There are not sufficient workers who are able, willing, qualified, and available to fill in for the employee on leave, and those services are needed for the business to operate at “minimal capacity.”

Tax credits under FFCRA and the CARES Act

FFCRA payroll tax credits

The FFCRA also establishes payroll tax credits to offset the new paid leave requirements. Employers may claim the credit for:

  • Paid leave taken
  • Medicare taxes on leave wages
  • Health plan expenses associated with leave wages

Note that paid leave wages are not subject to Social Security taxes, so these may not be claimed.

To qualify for the FFCRA tax credit, employers must:

  • Create a separate allocation of qualified paid leave
  • Track this separate allocation separately from regular paid leave
  • Report it as qualified paid leave used in their quarterly payroll tax filings on form 941

Social Security tax deferral

Under the Coronavirus Aid, Relief, and. Economic Security Act (CARES), employers may defer the employer portion of Social Security taxes between March 27 and December 21, 2020. The stipulations are that at least 50 percent of the deferred taxes must be paid by the end of 2021, and the remainder paid by the end of 2022.

Employers who take out a Paycheck Protection Program (PPP) loan that will be forgiven are ineligible to defer Social Security taxes, however, “on April 10, the IRS issued guidance clarifying that an employer may defer the employer’s portion of Social Security taxes until it actually receives a decision from its lender that its PPP loan has been forgiven,” according to the Akerman.com legal website.

Employee retention tax credit

Some employers may claim “employee retention” payroll tax credits created by the CARES Act. This refundable tax credit is taken against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Employers are eligible if:

  • The company is fully or partially suspended as a result of coronavirus-related government quarantine orders, or
  • The company has a significant decline in gross receipts (e.g. gross receipts are 50 percent or less than the comparable quarter in 2019)

Further, employers must have averaged more than 100 FTE in 2019. The credit covers qualified wages and certain health care costs up to $10,000.00 for each employee who is not working due to one of the above reasons.

Note also that wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA.

Tax credit advances

To address cash flow concerns related to expanded paid leave, the CARES Act allows employers to apply for an advance on the tax credits with IRS Form 7200. IRS also notes, “In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees' share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act.”

PPP loan notes

While not a tax credit, the Paycheck Protection Program (PPP) was also created by the CARES Act. This program, administered by the Small Business Administration, provides loans to small businesses with the goal of keeping employees on payroll. PPP loans can be forgiven if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.

It’s important to understand that if you have a PPP loan you may not also claim employee retention tax credits.

There’s so much to keep track of at a time like this, so remember Horizon is here to keep you informed. Please contact us with any questions – stay safe!

 

Disclaimer: This article is provided for informational purposes only and is not intended as tax or legal advice. Please consult your tax preparer or qualified legal counsel with specific questions.

Topics: Taxes, Laws & Protections