By Jim Chinn, CPA, Tax Senior Manager
Updates on Employer Tax Credit Changes in Response to Coronavirus (COVID-19)
We are closely monitoring this evolving and unique economic situation. We will keep you updated and informed on how to respond to tax and regulation changes as they are announced. If you have questions about how these changes impact your unique individual or business tax situation, please contact your Keiter advisor. We are here to listen and provide sound advice.
The President signed the Families First Coronavirus Response Act into law on Wednesday, March 18, 2020. Among other things, the law requires many employers to provide paid leave to employees that are unable to work due to the COVID-19 outbreak and provides for new refundable employer tax credits to cover the additional costs. The IRS released initial guidance on the new requirements and tax credits last night, and while there are still many unanswered questions, we’d like to highlight the following takeaways:
- Business Qualifications – The paid leave requirements and employer tax credits apply to businesses with fewer than 500 employees. Businesses with less than 50 employees qualify for the small business exception and are not required to provide paid child care leave.
- Paid Sick Leave – Employers are required to provide 2 weeks (80 hours) of paid sick leave at 100% of employees pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis.
- Paid Child Care Leave – Employers, other than those meeting the small business exception, are required to provide 2 weeks (80 hours) of paid leave at 2/3 of the employee’s pay where the employee is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.
- Paid Sick Leave Credit – Businesses may receive a refundable tax credit for the costs incurred to provide paid sick leave related to the COVID-19 outbreak. Qualifying costs include 100% the employee’s regular pay, employer payroll taxes, and health insurance costs. The credit per employee is capped at $511 per day and $5,110 in the aggregate.
- Paid Child Care Leave Credit – Businesses, other than those meeting the small business exception, may receive a refundable tax credit for costs incurred to provide paid child care leave related to the COVID-19 outbreak. The credit is equal to 2/3 of the employee’s regular pay including the associated payroll taxes and cost of health insurance benefits and is capped at $200 per day and $10,000 in the aggregate.
The credits will presumably be claimed on Form 941 Employer Quarterly Federal Tax Return although it does not appear that businesses will have to wait for the filing of this form to receive the credit. Under guidance that is supposed to be issued by the IRS next week, employers will be able to reduce the amount of payroll taxes remitted periodically to the IRS by the amount of credit for which they are eligible. If there are not sufficient payroll taxes available to cover the costs of paid sick and child care leave then the employer will be able to file a request for an accelerated payment from the IRS.
If a business pays $5,000 in sick leave and is otherwise required to deposit $8,000 of payroll taxes, which includes taxes withheld from all employees pay, the business is only required to remit $3,000 on its next regular deposit date. Let’s say that the employer pays $10,000 in sick leave and is still otherwise required to deposit $8,000 of payroll taxes. In this case, the business would not remit any tax on its next regular deposit date and would file a request for an accelerated credit for the remaining $2,000.
Paid Sick Leave and Childcare Tax Credit Tip For Businesses
Businesses should add a mechanism to track paid sick leave and paid child care leave for their employees to quantify the cost incurred to comply with the new rules and thereby maximize the employer credit.
We will continue to share tax and other regulation changes as they become available. Stay current on COVID-19 related tax and accounting updates.
Source: IRS Paid Leave for Workers
Additional COVID-19 Resources:
- Central Virginia COVID-19 Response Fund for Local Nonprofits
- Federal and Virginia Tax Updates in Response to Coronavirus
- Not-for-Profit Disaster Loans Available in Response to COVID-19
- SBA Disaster Loans: A Financial Tool for Obtaining Liquidity
- IRS Defers Income Tax Payments in Response to COVID-19
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.