COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs

Issued by the IRS on March 31, 2020

An Eligible Employer substantiates eligibility for the sick leave or family leave tax credits if the employer receives a written request for such leave from the employee.

In which, they provide:

• The employee’s name
• Dates for which leave is requested
• A statement of the COVID-19 related reason the employee requests leave for
• Written support for such reason
• A statement that the employee cannot work, including by means of telework, for such reason
• In the case of a leave request based on a school closing or childcare provider unavailability, the statement should include:
  • The name and age of the child to be cared for
  • The name of the school that has closed, or place of care unavailable
  • A representation that no other person provides care for the child during the period for which the employee recieves family medical leave
  • With respect to the employee’s inability to work or telework because of a need to provide care for a child older than 14 during daylight hours, a statement that special circumstances exist requiring them to provide care.
  • Note the requirement that no other person cares for the child and that they are under 14, generally.
• In the case of a leave request based on a quarantine order or self-quarantine advice, the statement should include:
  • The name of the governmental entity ordering quarantine
  • The name of the healthcare professional advising self-quarantine
  • If the person subject to quarantine or advised to self-quarantine is not the employee, their name and relation to the employee

COVID-19-Related Tax Credits for Required Paid Leave Provided by Small to Midsize Businesses FAQs

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The Families First Coronavirus Response Act (“FFCRA”), signed by President Trump on March 18, 2020, provides small to midsize employers refundable tax credits that reimburse them for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.

The FFCRA gives businesses with fewer than 500 employees, referred to throughout these FAQs as “Eligible Employers,” funds to provide employees with paid sick, family, and medical leave for reasons related to COVID-19. Either for the employee’s own health needs or to care for family members.

Workers may receive up to 80 hours of paid sick leave for their own health needs or to care for others. Up to an additional 10 weeks of paid family leave available to care for a child whose school or place of care is closed or childcare provider is unavailable due to COVID-19 precautions.

The FFCRA covers the costs of this paid leave by providing small businesses with refundable tax credits. Certain self-employed individuals in similar circumstances are entitled to similar credits. For a more detailed overview of the law, see the “Overview of COVID-19-Related Tax Credits for Small and Midsize Businesses,” below.

For FAQs, see “Basic FAQs,” and the sections that follow. FAQs updated to address changes in the law or additional questions as they are raised.

Overview of COVID-19-Related Tax Credits for Small to Midsize Businesses

The FFCRA requires employers to provide paid leave through two separate provisions:

1. Emergency Paid Sick Leave Act (EPSLA) – Entitles workers to up to 80 hours of paid sick time when they are unable to work for certain reasons related to COVID-19
2. Emergency Family and Medical Leave Expansion Act (Expanded FMLA) – Entitles workers to certain paid family and medical leave. The FFCRA provides that employers subject to the EPSLA and the Expanded FMLA paid leave requirements are entitled to fully refundable tax credits to cover the cost of the leave required to be paid for these periods of time during which employees are unable to work (which for purposes of these rules, includes telework). Certain self-employed persons in similar circumstances are entitled to similar credits.

The following section provides an overview of FFCRA’s refundable tax credit provisions. The FAQs that follow provide more detailed information regarding the requirements, limitations, and application of the paid leave credits.

The Wage and Hour Division of the Department of Labor (DOL) administers the EPSLA and the Expanded FMLA. It posted FAQs and relevant information about the paid leave requirements at the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

Eligible Employers are entitled to refundable tax credits for qualified sick leave wages and qualified family leave wages. Collectively “qualified leave wages” under sections 7001 and 7003 of the FFCRA respectively. These tax credits increase by the qualified health plan expenses allocable to, and the Eligible Employer’s share of Medicare tax on, the qualified leave wages.

Eligible Employers include businesses and tax-exempt organizations with fewer than 500 employees required to provide paid sick leave under the EPSLA and paid family leave under the Expanded FMLA. Note that the FFCRA requires most government employers to provide paid leave. It does not entitle those governmental employers to tax credits for this leave. For more information about Eligible Employers, see “What employers may claim the tax credits?”

Under sections 7002 and 7004 of the FFCRA, self-employed individuals are entitled to equivalent credits based on similar circumstances in which the individual cannot work. For more information about how self-employed individuals can claim the credits, see “Specific Provisions Related to Self-Employed Individuals.”

The refundable tax credits apply to qualified sick leave wages and qualified family leave wages paid for certain periods when an employee cannot work. As described below, during the period beginning April 1, 2020, and ending December 31, 2020. The same period determines credits for qualified sick leave equivalent amounts and qualified family leaves equivalent amounts for certain self-employed individuals.

Overview of Paid Sick Leave Refundable Credit

The EPSLA requires Eligible Employers to provide employees with paid sick leave if the employee cannot work, including telework, due to any of the following.

The employee:

1. Is under a Federal, State, or local quarantine or isolation order related to COVID-19
2. Was advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
3. Experiences symptoms of COVID-19 and seeking a medical diagnosis
4. Cares for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
5. Cares for their child if their school or place of care closed
6. The childcare provider of their child is unavailable, due to COVID–19 precautions
7. Experiences any other substantially similar condition specified by the U.S. Department of Health and Human Services

An employee who cannot work for reasons due to a COVID-19 circumstance described in 1-3 qualifies for paid sick leave for up to two weeks up to 80 hours at their regular rate of pay. If higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day and $5,110 in the aggregate. For more information, see “What is the rate of pay for qualified sick leave wages if an employee is unable to work due to their own health needs?”

An employee who cannot work due to a COVID-19 circumstance described in 4-6 above qualifies for paid sick leave for up to two weeks up to 80 hours at 2/3 their regular rate of pay. If higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day and $2,000 in the aggregate. For more information, see “What is the rate of pay for qualified sick leave wages if an employee is unable to work because he or she needs to care for others?”

The Eligible Employer qualifies for a fully refundable tax credit equal to the required paid sick leave. This tax credit also includes the Eligible Employer’s share of Medicare tax imposed on those wages. Also, its allocable cost of maintaining health insurance coverage for the employee during the sick leave period, qualified health plan expenses.

The Eligible Employer is not subject to the employer portion of the social security tax imposed on those wages. Eligible Employers subject to the Railroad Retirement Tax Act are not subject to either social security or Medicare tax on the qualified sick leave wages. Accordingly, they do not get credit for Medicare tax.

Overview of Paid Family Leave Refundable Credit

In addition to the paid sick leave credit, under the expanded FMLA, an employee who cannot work, including telework, because of a need to care for a child whose school closed or whose child care provider is unavailable due to COVID-19, as described above, qualifies for paid family and medical leave.

Equal to two-thirds of their regular pay, up to $200 per day and $10,000 in the aggregate. Up to 10 weeks of qualifying leave counts towards the family leave credit. For more information, see “What is included in “qualified family leave wages”?”

The Eligible Employer qualifies for a fully refundable tax credit equal to the required paid family and medical leave, qualified family leave wages. This tax credit also includes the Eligible Employer’s share of Medicare tax imposed on those wages. Also, its cost of maintaining health insurance coverage for the employee during the family leave period, qualified health plan expenses.

The Eligible Employer is not subject to the employer portion of the social security tax imposed on those wages. Eligible Employers subject to the Railroad Retirement Tax Act are not subject to either social security tax or Medicare tax on the qualified family leave wages. Accordingly, they do not get credit for Medicare tax. For more information, see “How does an Eligible Employer determine the amounts of the qualified family leave wages it is required to pay?”

Payment of the Sick & Family Leave Credit

Eligible Employers can receive a credit in the full amount of the qualified sick leave wages and qualified family leave wages. Plus, allocable qualified health plan expenses, the employer’s share of Medicare tax, and paid leave during the period beginning April 1, 2020, and ending December 31, 2020.

The credit is allowed against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code (the “Code”), the Old-Age, Survivors, and Disability Insurance tax (social security tax), and section 3221(a) of the Code (Railroad Retirement Tax Act Tier 1 Rate) on all wages and compensation paid to all employees.

If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment. It is refunded to the employer under sections 6402(a) or 6413(a) of the Code. The qualified sick leave wages and qualified family leave wages are not subject to the taxes imposed on employers by sections 3111(a) and 3221(a) of the Code.

Employers, other than those subject to the Railroad Retirement Tax Act, qualify for additional credit for the taxes on employers imposed by section 3111(b) of the Code (Hospital Insurance and Medicare tax) on such wages. Eligible Employers that pay qualified leave wages can retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid.

Plus, the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages. Rather than depositing them with the IRS. The federal employment taxes available for retention by Eligible Employers include federal income taxes withheld from employees, the employees’ share of social security, Medicare taxes, the employer’s share of social security, and Medicare tax with respect to all employees.

If the federal employment taxes yet to be deposited are not sufficient to cover the Eligible Employer’s cost of qualified leave wages, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, the employer can file a request for an advance payment from the IRS. The IRS expects to begin processing these requests in April 2020.

Eligible Employers claiming the credits for qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare taxes must retain documentation supporting each employee’s leave to substantiate the claim for the credits. As well as retaining the Forms 941, Employer’s Quarterly Federal Tax Return, and 7200, Advance of Employer Credits Due to COVID-19, and any other applicable filings made to the IRS requesting the credit.

For more detail on the refundable tax credits and the procedures to receive payment of the advance credit, see “How to Claim the Credits.” Eligible Employers claiming the credits for qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare taxes must retain documentation supporting each employee’s leave to substantiate the claim for the credits.

As well as retaining the Form 941, Employer’s Quarterly Federal Tax Return, Form 7200, Advance of Employer Credits Due To COVID-19, and any other applicable filings made to the IRS requesting the credit. For more detail on the refundable tax credits and the procedures to receive payment of the advance credit, see “How to Claim the Credits.”

Basic FAQs

1. What tax credits does the FFCRA provide?

The FFCRA provides businesses with tax credits to cover certain costs of providing employees with required paid sick leave and expanded family and medical leave for reasons related to COVID-19, from April 1, 2020, through December 31, 2020.

2. When can employers start claiming the credits?

Eligible Employers may claim tax credits for qualified leave wages paid to employees on leave due to paid sick leave or expanded family and medical leave for reasons related to COVID-19 for leave taken beginning on April 1, 2020, and ending on December 31, 2020.

Eligible Employers claim the credits on their federal employment tax returns (e.g., Form 941, Employer’s Quarterly Federal Tax Return). 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 expects to begin processing these requests in April 2020.

For the circumstances, amounts, and period for which the credits are available, see “Determining the Amount of the Tax Credit for Qualified Sick Leave Wages,” “Determining the Amount of the Tax Credit for Qualified Family Leave Wages,” and “Periods of Time for Which Credits are Available.”

3. When do employers start to receive the credits?

After qualified leave wage payments have been made, Eligible Employers may receive payment of the credits in accordance with applicable IRS procedures. For more information, see “How do Eligible Employers Claim The Credit?”

4. What documentation must an Eligible Employer retain to substantiate eligibility to claim the tax credits?

Eligible Employers claiming credits for qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare taxes must retain documentation supporting each employee’s leave to substantiate the claim for the credits.

Retain the Forms 941, Employer’s Quarterly Federal Tax Return, Form 7200, Advance of Employer Credits Due to COVID-19, and any other applicable filings made to the IRS requesting the credit. For more information, see “How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?”

5. What employers may claim the tax credits?

Eligible Employers that can claim the refundable tax credits include businesses and tax-exempt organizations that:

• Have fewer than 500 employees
• Under the FFCRA, must pay “qualified sick leave wages” or “qualified family leave wages”

For more information, see “Only businesses that employ fewer than 500 employees eligible for the credit. Only those businesses must provide qualified leave wages. How is the fewer than 500 employees threshold determined?”

6. What is the amount of the refundable tax credits available to Eligible Employers?

The credits cover 100% of up to 10 days of the qualified sick leave wages and up to 10 weeks of the qualified family leave wages. Also, 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.

Qualified sick leave and qualified family leave under the FFCRA are in addition to employees’ preexisting leave entitlements. See the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers for rules regarding required FFCRA paid sick leave, expanded family leave, medical leave, and other entitlements. Eligible Employers may only claim credit for qualified leave wages.

Example

An Eligible Employer pays $10,000 in qualified sick leave wages and qualified family leave wages in Q2 2020. It does not owe the employer’s share of social security tax on the $10,000. It does owe $145 for the employer’s share of Medicare tax.

Its credits equal $10,145. This includes 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 accordance with normal procedures.

Eligible Employers must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid. For more information, see “What is included in “qualified sick leave wages”?” “What is included in “qualified family leave wages”?”

7. What are “qualified sick leave wages”?

Qualified sick leave wages are wages that the FFCRA requires an employer to pay to an employee who cannot work or telework because of either their personal health status. That is, the employee is under COVID-19 quarantine, self-quarantine, has COVID-19 symptoms, and seeks a medical diagnosis.

Also, the employee’s need to care for others. That is, the employee cares for someone with COVID-19 or a child whose school closed or childcare provider is unavailable. For more information, see “What is included in qualified sick leave wages?”

8. What are “qualified family leave wages”?

Qualified family leave wages are wages that the FFCRA requires an employer to pay to an employee who cannot work or telework because they care for a child whose school closed or childcare provider is unavailable due to COVID-19-related reasons. For more information, see “What is included in “qualified family leave wages”?”

9. What are “qualified health plan expenses”?

Qualified health plan expenses are amounts paid or incurred by an Eligible Employer to provide and maintain a group health plan, as defined in section 5000(b)(1) of the Internal Revenue Code, allocable to the employee’s qualified leave wages. For more information, see “Determining the Amount of Allocable Qualified Health Plan Expenses.”

10. What is the Eligible Employer’s share of Medicare tax on qualified leave wages?

The FFCRA adds to the tax credits the amount of the Hospital Insurance tax, also known as Medicare tax, that Eligible Employers must pay on qualified leave wages. The rate for this tax is 1.45% of wages. Eligible employers subject to Railroad Retirement Tax Act do not get this credit.

Note:

There is no credit for the employer portion of OASDI tax, also known as social security tax, that Eligible Employers must pay on the qualified leave wages. The qualified leave wages are not subject to this tax.

11. Are any businesses exempt from the requirements to provide qualified sick or family leave wages?

The FFCRA permits the Department of Labor to provide rules that a business with fewer than 50 employees may use to claim an exemption from providing paid sick leave, expanded family leave, and medical leave for the purpose of caring for a child whose school closed or whose childcare provider is unavailable due to COVID-19-related reasons.

If providing these qualified leave wages could jeopardize the viability of their businesses as a concern. Any business that claims the exemption is not entitled to tax credits for any qualified leave wages that they are exempt from providing.

Note:

FFCRA permits employers whose employees are healthcare providers or emergency responders not to provide qualified sick leave or qualified family leave wages to those employees. For more information about exemptions from the requirement to provide paid sick leave, expanded family leave, and medical leave under the FFCRA, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

12. How do Eligible Employers claim the credits?

Eligible Employers will report their total qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages for each quarter on their federal employment tax return.

Usually Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is used to report income tax and social security and Medicare taxes withheld by most Eligible Employers from employee wages, as well as the Eligible Employer’s own share of social security and Medicare taxes.

In anticipation of receiving the credits, Eligible Employers can fund qualified leave wages, 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, including withheld taxes, that otherwise are required to be deposited with the IRS.

This means that in anticipation of claiming the credits on Form 941, Eligible Employers can retain the federal employment taxes that they otherwise would have deposited. Including federal income tax withheld from employees, the employees’ share of social security, Medicare taxes, the Eligible Employer’s share of social security, and Medicare taxes with respect to all employees.

Form 941 provides instructions about how to reflect the reduced liabilities for the quarter related to the deposit schedule. For more information, see “How to Claim the Credits.”

13. What if an Eligible Employer does not have enough federal employment taxes set aside for deposit to cover its obligation to provide qualified leave wages?

If an Eligible Employer does not have enough federal employment taxes set aside for deposit to cover its obligation to provide qualified leave wages, allocable qualified health plan expenses, and the Employer’s share of Medicare tax on the qualified leave wages. The employer may request an advance of the credits.

They do so by completing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The Eligible Employer accounts for the amounts received as an advance when it files its Form 941, Employer’s Quarterly Federal Tax Return, for the relevant quarter. For more information about claiming the tax credits for providing qualified leave wages, see “How to Claim the Credits.”

14. What makes the credits “fully refundable”?

The credits are fully refundable because the Eligible Employer may get a refund if the amount of the credits exceeds certain federal employment taxes the Eligible Employer owes. If for any calendar quarter the amount of the credits they’re entitled to exceed the employer portion of the social security tax on all wages.

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.

15. Are similar tax credits available to self-employed individuals?

Yes. The FFCRA also provides comparable credits for self-employed individuals carrying on any trade or business within the meaning of section 1402 of the Internal Revenue Code. The self-employed individual could receive paid leave under the EPSLA or Expanded FMLA if they were an employee of an employer, other than themselves. For more information about how the credits apply to self-employed individuals, see “Specific Provisions Related to Self-Employed Individuals.”

16. Only businesses that employ fewer than 500 employees are eligible for the credits because only those businesses are required to provide qualified leave wages. How is the “fewer than 500 employees” threshold determined?

A business is considered to have fewer than 500 employees if, at the time of an employee’s leave, the business employs fewer than 500 full-time and part-time employees within the United States. This includes any State of the United States, the District of Columbia, Territory, or possession of the United States. The DOL guidance provides a more detailed summary of which workers must be taken into account for the threshold.

DOL guidance also explains when business entities should be treated as separate employers or aggregated as a single employer for purposes of determining their total number of employees. For more information, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

17. May an Eligible Employer reduce its federal employment tax deposit by the qualified leave wages that it has paid without incurring a failure to deposit penalty?

Yes. An Eligible Employer will not be subject to a penalty under section 6656 of the Internal Revenue Code for failing to deposit federal employment taxes relating to qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages in a calendar quarter if:

1. Eligible Employer paid qualified leave wages to its employees in the calendar quarter before the required deposit.
2. The amount of federal employment taxes that the Eligible Employer does not deposit is less than or equal to the amount of the Eligible Employer’s anticipated tax credits for these qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages for the calendar quarter as of the time of the required deposit.
3. Eligible Employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.

For more information about the relief from the penalty for failure to deposit federal employment taxes on account of qualified leave wages, see Notice 2020-22 (PDF).

18. May an Eligible Employer receive both the tax credits for qualified leave wages under the FFCRA and the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)?

Yes, if an Eligible Employer also meets the requirements for the employee retention credit. It may receive both credits, but not for the same wage payments. Section 2301 of the CARES Act allows certain employers subject to a full or partial closure order due to COVID-19 or experiencing a significant decline in gross receipts a tax credit for retaining their employees.

This employee retention credit is equal to 50% of qualified wages including allocable qualified health plan expenses paid to employees after March 12, 2020, and before January 1, 2021, up to $10,000 in qualified wages for each employee for all calendar quarters.

However, the qualified wages for the employee retention credit do not include the number of qualified leave wages for which the employer received tax credits under the FFCRA. The IRS expects to issue Frequently Asked Questions on the employee retention credit under the CARES Act during April 2020.

19. May an Eligible Employer receive both the tax credits for qualified leave wages under the FFCRA and a Small Business Interruption Loan under the CARES Act?

Yes. However, if an Eligible Employer receives tax credits for qualified leave wages, those wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness under section 1106 of the CARES Act.

Determining the Amount of the Tax Credit for Qualified Sick Leave Wages

1. What is included in “qualified sick leave wages”?

Qualified sick leave wages are wages, as defined in section 3121(a) of the Internal Revenue Code for social security and Medicare tax purposes, that Eligible Employers must pay eligible employees for periods of leave during which they cannot work or telework.

The employee is:

• Subject to a Federal, State, or local quarantine or isolation order related to COVID-19
• Advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
• Experiencing symptoms of COVID-19 and seeking a medical diagnosis
• Caring for an individual subject to a Federal, State, or local quarantine or isolation order related to COVID-19
• Advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
• Caring for a child of such employee if their school closed, or their childcare provider is unavailable due to COVID-19 precautions
• Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor

2. How much credit may an Eligible Employer receive for qualified sick leave wages that it pays?

An Eligible Employer may claim a fully refundable tax credit equal to 100 percent of the qualified sick leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified sick leave wages it pays.

For more information about how to determine the number of sick leave wages for which an Eligible Employer may receive credit, see “How does an Eligible Employer determine the amounts of the qualified sick leave wages it is required to pay?”

3. How does an Eligible Employer determine the amounts of the qualified sick leave wages to pay?

The amounts that an Eligible Employer must pay for qualified sick leave wages vary depending on the reason for which the employee is unable to work or telework, the duration of the employee’s absence, the employee’s hours, and the employee’s regular rate of pay (or, if higher, the federal minimum wage or any applicable State or local minimum wage).

4. What is the rate of pay for qualified sick leave wages if an employee cannot work or telework due to their own health needs?

If an employee cannot work or telework because they:

• Are subject to a Federal, State, or local quarantine or isolation order related to COVID-19
• Were advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
• Experience symptoms of COVID-19 and seek a medical diagnosis

Eligible Employers must pay qualified sick leave wages for up to two weeks up to 80 hours at a rate for each hour of the greatest of the following:

• An employee’s regular rate of pay as determined under section 7(e) of the Fair Labor Standards Act of 1938
• The minimum wage rate in effect under section 6(a)(1) of the Fair Labor Standards Act of 1938
• Whichever is greater, the minimum wage rate in effect for the employee, or in the applicable State or locality in which the employee is employed

The maximum amount of qualified sick leave wages paid for these reasons is up to $511 per day and $5,110 in the aggregate. For more information, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

5. What is the rate of pay for qualified sick leave wages if an employee cannot work or telework because they need to care for others?

If an employee cannot work or telework because they:

• Care for an individual subject to a Federal, State, or local quarantine or isolation order related to COVID-19
• Were advised by a health care provider to self-quarantine due to concerns related to COVID-19
• Care for a child if their school closed, or their childcare provider of such child is unavailable due to COVID-19 precautions
  Experience any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor

Eligible Employers must pay qualified sick leave wages for up to two weeks up to 80 hours at a rate for each hour of 2/3 of the greatest of the following:

• An employee’s regular rate of pay as determined under section 7(e) of the Fair Labor Standards Act of 1938
• Minimum wage rate in effect under section 6(a)(1) of the Fair Labor Standards Act of 1938
• Whichever is greater, the minimum wage rate in effect for the employee in the applicable State or locality in which the employee is employed

The maximum amount of qualified sick leave wages paid due to the need to care for others as described above is up to $200 per day and $2,000 in the aggregate. For more information, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

6. How are employees’ hours determined for purposes of the qualified paid sick leave requirements?

Full-time employees are entitled to up to 80 hours of paid sick leave between April 1, 2020, and December 31, 2020. Part-time employees are entitled to the number of hours of paid sick leave that the employee works, on average, in a two-week period. If the employee’s normal scheduled hours are unknown or variable, under other alternative determinations, as provided by DOL guidance.

For more information, including how to determine whether an employee is full-time or part-time and how to determine the number of hours paid to employees entitled to paid sick leave, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

7. Are amounts other than qualified sick leave wages included in the tax credit for required sick leave?

Yes. The credit also includes the amount of the Eligible Employer’s share of Medicare tax imposed on the qualified sick leave wages and any qualified health plan expenses allocable to those wages. Qualified health plan expenses are amounts paid or incurred by the Eligible Employer to provide a group health plan to the extent that amounts are excluded from the employees’ gross income under section 106(a) of the Internal Revenue Code.

The qualified sick leave wages are not subject to the employer portion of social security tax. The credit for the employer’s share of Medicare tax does not apply to Eligible Employers that are subject to Railroad Retirement Tax Act (RRTA) because qualified sick leave wages are not subject to Medicare tax under RRTA.

For more information about the additions to the tax credit for allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax, see “Determining the Amount of Allocable Qualified Health Plan Expenses,” and “Determining the Amount of the Increase to the Credits for the Eligible Employer’s Share of Medicare Tax.”

8. Is a similar tax credit available to self-employed individuals?

Yes. The FFCRA also provides a comparable credit for self-employed individuals carrying on any trade or business within the meaning of section 1402 of the Internal Revenue Code. If the self-employed individual would be entitled to receive paid sick leave under the EPSLA if the individual were an employee of an employer other than themselves. For more information, see “Specific Provisions Related to Self-Employed Individuals.”

Determining the Amount of Tax Credit for Qualified Family Leave Wages

The Family and Medical Leave Act (FMLA) generally entitles eligible employees of covered employers to unpaid, job-protected leave for specified family and medical reasons. These FAQs refer to this portion of the FFCRA as “the Expanded FMLA.” The FFCRA amended the FMLA.

It requires an Eligible Employer to provide qualified family leave wages when an employee cannot work or telework due to a need for leave to care for the child of the employee if their school closed, or their childcare provider is unavailable, for reasons related to COVID-19. For more information, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

1. What is included in “qualified family leave wages”?

Qualified family leave wages are wages, as defined in section 3121(a) of the Internal Revenue Code for social security and Medicare tax purposes, that Eligible Employers must pay eligible employees for periods of leave during which they cannot work or telework due to a need to care for a child if their school closed or their childcare provider is unavailable, due to COVID-19 related reasons.

The first 10 days for which an employee takes leave, for this reason, may be unpaid. However, during that 10-day period, an employee may receive qualified sick leave wages as provided under the ESPLA. They may receive other forms of paid leave, like accrued sick leave, annual leave, or other paid time off under the Eligible Employer’s policy.

After an employee takes leave for 10 days, the Eligible Employer must provide the employee with qualified family leave wages for up to 10 weeks. For more information, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

2. How much credit may an Eligible Employer receive for qualified family leave wages?

An Eligible Employer may claim a fully refundable tax credit equal to 100 percent of the qualified family leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified family leave wages, it pays.

For more information about how to determine the number of family leave wages for which an Eligible Employer may receive credit, see “How does an Eligible Employer determine the amounts of the qualified family leave wages it is required to pay?”

3. How does an Eligible Employer determine the amounts of the qualified family leave wages to pay?

The Eligible Employer is required to pay the employee qualified family leave wages in an amount equal to at least two-thirds of the employee’s regular rate of pay. Multiplied by the number of hours the employee otherwise would have been scheduled to work. Not to exceed $200 per day and $10,000 in the aggregate for the calendar year.

4. What is the rate of pay for qualified family leave wages?

An Eligible Employer must pay qualified family leave wages for up to ten weeks at a rate that is 2/3 of the employee’s regular rate of pay as determined under section 7(e) of the Fair Labor Standards Act of 1938.

5. Are amounts other than qualified family leave wages included in the tax credit for required paid family leave?

Yes. The credit also includes the amount of the Eligible Employer’s share of Medicare tax imposed on the qualified family leave wages and any qualified health plan expenses allocable to those wages.  Qualified health plan expenses are amounts paid or incurred by the Eligible Employer to provide a group health plan to the extent that the amounts are excluded from the employee’s gross income under section 106(a) of the Internal Revenue Code.

The qualified family leave wages are not subject to the employer portion of social security tax. The credit for the employer’s share of Medicare tax does not apply to Eligible Employers that are subject to Railroad Retirement Tax Act (RRTA) because qualified family leave wages are not subject to Medicare tax under RRTA.

For more information about the additions to the tax credit for allocable qualified health plan expenses, see “Determining the Amount of Allocable Qualified Health Plan Expenses.” For more information about determining the Eligible Employer’s share of Medicare tax, see “What is the Eligible Employer’s share of Medicare tax on qualified leave wages?”

6. Is a similar tax credit available to self-employed individuals?

Yes. The FFCRA also provides a comparable credit for self-employed individuals carrying on any trade or business within the meaning of section 1402 of the Internal Revenue Code if the individual could receive paid leave under the Expanded FMLA. If the individual were an employee of an employer other than themselves. For more information, “Specific Provisions Related to Self-Employed Individuals.”

Determining the Amount of Allocable Qualified Health Plan Expenses

“Qualified health plan expenses” are paid or incurred by the Eligible Employer to provide a group health plan as defined in section 5000(b)(1) of the Internal Revenue Code (the “Code”). Only to the extent that those amounts are excluded from the gross income of employees by reason of section 106(a) of the Code.

Generally, the tax credits for qualified sick leave wages and qualified family leave wages are increased by the qualified health plan expenses allocable to each type of qualified leave wages. Qualified health plan expenses are properly allocated to the qualified sick or family leave wages.

If the allocation is made on a pro-rata basis among covered employees. For example, the average premium for all employees covered by the policy and pro-rata on the basis of periods of coverage relative to the time periods of leave to which such wages relate.

1. Does the amount of qualified health plan expenses include both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the employee?

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.

2. For an Eligible Employer that sponsors more than one plan for its employees. For example, for both a group health plan and a health flexible spending arrangement (FSA), or more than one plan covering different employees. How are the qualified health plan expenses for each employee determined?

The qualified health plan expenses are determined separately for each plan. Then, for each plan, those expenses are allocated to the employees who participate in that plan. In the case of an employee who participates in more than one plan, the allocated expenses of each plan in which they participate are aggregated for that employee.

3. For an Eligible Employer who sponsors a fully-insured group health plan, how are the qualified health plan expenses of that plan allocated to the qualified sick or family leave wages on a pro-rata basis?

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. COBRA applicable premium for the employee typically available from the insurer
2. One average premium rate for all employees
3. A substantially similar method takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage

If an Eligible Employer chooses to use one average premium rate for all employees, the allocable amount for each day an employee covered by the insured group health plan is entitled to qualified leave wages.

It could be determined using the following steps:

1. The Eligible Employer’s overall annual premium for the employees covered by the policy is divided by the number of employees covered by the policy to determine the average annual premium per employee.
2. The average annual premium per employee is divided by the average number of workdays during the year by all covered employees treating days of paid leave as a workday. A workday includes any day on which work is performed to determine the average daily premium per employee.
3. For example, a full-year employee working five days per week may be treated as working 52 weeks x 5 days or 260 days.
4. Calculations for part-time and seasonal employees who participate in the plan should be adjusted as appropriate.
5. Eligible Employers may use any reasonable method for calculating part-time employee workdays.
6. The resulting amount is the amount allocated to each day of qualified sick or family leave wages.

Example:

An Eligible Employer sponsors an insured group health plan that covers 400 employees, some with self-only coverage, and some with family coverage. Each employee is expected to have 260 workdays a year. Five days a week for 52 weeks.

The employees contribute a portion of their premium by pre-tax salary reduction, with different amounts for self-only and family. The total annual premium for the 400 employees is $5.2 million. This includes both the amount paid by the Eligible Employer and the amounts paid by employees through salary reduction.

For an Eligible Employer using one average premium rate for all employees, the average annual premium rate is $5.2 million divided by 400, or $13,000. For each employee expected to have 260 workdays a year, this results in a daily average premium rate equal to $13,000 divided by 260, or $50.  That $50 is the number of qualified health expenses allocated to each day of paid sick or family leave per employee.

4. For an Eligible Employer who sponsors a self-insured group health plan, how are the qualified health plan expenses of that plan allocated to the qualified leave wages on a pro-rata basis?

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. COBRA applicable premium for the employee typically available from the administrator.
2. Any reasonable actuarial method to determine the estimated annual expenses of the plan.

If the Eligible Employer uses a reasonable actuarial method to determine the estimated annual expenses of the plan, then rules similar to those for insured plans determine the number of expenses allocated to an employee. The estimated annual expense is divided by the number of employees covered by the plan.

That amount is divided by the average number of workdays during the year by the employees. Treating days of paid leave as workdays. Any day on which an employee performs any work as workdays. The resulting amount is the amount allocated to each day of qualified sick or family leave wages.

5. For an Eligible Employer who sponsors a health savings account (HSA), or Archer Medical Saving Account (Archer MSA) and a high deductible health plan (HDHP), are contributions to the HSA or Archer MSA included in the qualified health plan expenses?

The amount of qualified health plan expenses does not include Eligible Employer contributions to HSAs or Archer MSAs. Eligible Employers who sponsor an HDHP should calculate the number of qualified expenses in the same manner as an insured group health plan, or a self-insured plan, as applicable.

6. For an Eligible Employer who sponsors a health reimbursement arrangement (HRA), a health flexible spending arrangement (health FSA), or a qualified small employer health reimbursement arrangement (QSEHRA), are contributions to the HRA, health FSA, or QSEHRA included in the qualified health plan expenses?

The amount of qualified health plan expenses may include contributions to an HRA including an individual coverage HRA, or a health FSA. It does not include contributions to a QSEHRA. To allocate contributions to an HRA or a health FSA, Eligible Employers should use the number of contributions made on behalf of the particular employee.

How to Claim the Credits

1. How does an Eligible Employer claim the refundable tax credits for qualified leave wages? Plus, any allocable qualified health plan expenses and the amount of the Eligible Employer’s share of Medicare tax.

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.  Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax.

In anticipation of receiving the credits, Eligible Employers can fund qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages. By accessing federal employment taxes, including withheld taxes, required to be deposited with the IRS or by requesting an advance from the IRS.

For more information on ways Eligible Employers can access funds for the credit before filing the Form 941, see “How can an Eligible Employer that is required to pay qualified leave wages to fund the payment of these wages if the Eligible Employer does not have sufficient federal employment taxes set aside for deposit to cover those payments? Can the employer get an advance of the credits?”

2. Can an Eligible Employer be required to pay qualified leave wages to fund these payments before receiving the credits by reducing its federal employment tax deposits?

An Eligible Employer may fund the qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages. By accessing federal employment taxes, including those that the Eligible Employer already withheld. Set aside for deposit with the IRS, for other wage payments made during the same quarter as the qualified leave wages.

An Eligible Employer that pays qualified leave wages to its employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter. This may reduce the amount of federal employment taxes it deposits for that quarter by the amount of the qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages) paid in that calendar quarter. The Eligible Employer must account for the reduction in deposits on Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Example:

An Eligible Employer paid $5,000 in qualified sick leave wages and qualified family leave wages and allocable health plan expenses. The Eligible Employer’s share of Medicare tax on the qualified leave wages. It is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees. For wage payments made during the same quarter as the $5,000 in qualified leave wages.

The Eligible Employer may keep up to $5,000 of the $8,000 of taxes the Eligible Employer was going to deposit, and it will not owe a penalty for keeping the $5,000. Then, the Eligible Employer is only required to deposit the remaining $3,000 on its required deposit date. The Eligible Employer later accounts for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

For more information about relief under the FFCRA from failure to deposit penalties for failure to timely deposit certain federal employment taxes, see Notice 2020-22 (PDF) and “May an Eligible Employer reduce its federal employment tax deposit by the qualified leave wages that it has paid without incurring a failure to deposit penalty?”

3. Is an Eligible Employer that reduces its federal employment tax deposits to fund qualified leave wages that it has paid subject to a penalty for failing to deposit federal employment taxes?

No, provided the Eligible Employer does not claim an advance for the same portion of the anticipated credits it relied upon to reduce its deposits. That is, without being subject to a penalty for failing to deposit federal employment taxes under section 6656 of the Internal Revenue Code, an Eligible Employer that paid qualified leave wages to its employees in a calendar quarter.

Before it is required to deposit federal employment taxes with the IRS, it may reduce the amount of the federal employment tax deposit by the amount of the qualified leave wages and allocable qualified health plan expenses. Plus, the Eligible Employer’s share of Medicare tax on the qualified leave wages paid by the employer in that calendar quarter. As long as the employer does not also seek an advance credit for the same amount.

The total amount of any reduction in any required deposit may not exceed the total amount of qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages in the calendar quarter. Minus any amount of qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages that had been previously used to:

1. Reduce a prior required deposit in the calendar quarter.
2. Obtain the relief provided by this notice.
3. Seek payment of an advance credit.

For more information about relief under the FFCRA from failure to deposit penalties for failure to timely deposit certain federal employment taxes, see Notice 2020-22 (PDF). “May an Eligible Employer reduce its federal employment tax deposit by the qualified leave wages that it has paid without incurring a failure to deposit penalty?”

4. How can an Eligible Employer required to pay qualified leave wages fund the payment of these wages if they do not have sufficient federal employment taxes set aside for deposit to cover those payments? Can the employer get an advance of the credits?

Yes. 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, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages.

Eligible Employers 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, any allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages 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. If it has not paid qualified leave wages, 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 Form 7200, it needs to reconcile this advance credit and its deposits with the qualified leave wages on Form 941 or other applicable federal employment tax returns such as Form 944 or Form CT-1. It may have an underpayment of federal employment taxes for the quarter.

Example:

An Eligible Employer paid $10,000 in qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages. It is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same quarter.

The Eligible Employer can keep the entire $8,000 of taxes that the Eligible Employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on Form 941. The Eligible Employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.

5. If the qualified leave wages, any allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages exceed their share of social security tax owed for a quarter, how does the Eligible Employer get a refund of the excess credits? Does this affect what the Eligible Employer puts on its Form 941?

The amount of qualified leave wages, any allocable qualified health plan expenses, and the Eligible Employer’s share of the Medicare tax on the qualified leave wages in excess of the social security tax the Eligible Employer owes for the quarter is refundable.

If the amount of the credits exceeds the employer portion of social security tax, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) or 6413(a) of the Internal Revenue Code.

Consistent with its treatment as an overpayment, the excess can offset any remaining tax liability on Form 941, Employer’s Quarterly Federal Tax Return. The amount of any remaining excess will be reflected as an overpayment on 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.

6. How does an Eligible Employer obtain Form 7200? Where should it send its completed form to receive the advance credit?

An Eligible Employer may obtain Form 7200, Advance Payment of Employer Credits Due to COVID-19. It may fax its completed form to 855-248-0552.

7. What if an Eligible Employer does not initially pay an employee qualified leave wages when the employee is entitled to those wages but pays those wages at a later date?

An Eligible Employer can claim the credits once it pays the employee for the period of paid sick leave, expanded family, and medical leave. As long as the qualified leave wages relate to leave taken during the period beginning on April 1, 2020, and ending on December 31, 2020.

How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?

1. What information should an Eligible Employer receive from an employee and maintain to substantiate eligibility for the sick leave or family leave credits?

An Eligible Employer substantiates eligibility for the sick leave or family leave credits if the employer receives a written request for such leave from the employee.

In which, the employee provides:

1. The employee’s name
2. The date for which leave is requested
3. A statement of the COVID-19 related reason the employee requests leave
4. Written support for such reason
5. A statement that the employee cannot 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
• The name of the healthcare professional advising self-quarantine.
• 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 cared for
• The name of the school closed or place of care unavailable
• A representation that no other person cares for the child during the period for which the employee receives family medical leave
• With respect to the employee’s inability to work or telework because of a need to provide care for a child older than 14 during daylight hours:
  • A statement that special circumstances exist requiring the employee to provide care

2. What additional records should an Eligible Employer maintain to substantiate eligibility for the sick leave or family leave credit?

An Eligible Employer will substantiate eligibility for the sick leave or family leave credits if, in addition to the information set forth in “What information should an Eligible Employer receive from an employee and maintain to substantiate eligibility for the sick leave or family leave credits?”

The employer creates and maintains records that include the following information:

1. 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.
2. Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages. See “Determining the Amount of Allocable Qualified Health Plan Expenses” for methods to compute this allocation.
3. Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19, the employer submitted to the IRS.
4. Copies of the completed Forms 941, Employer’s Quarterly Federal Tax Return, that the employer submitted to the IRS.
5. 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.

3. How long should an Eligible Employer maintain records to substantiate eligibility for the sick leave or family leave credit?

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.

Periods of Time for Which Credits are Available

1. How long are the refundable tax credits for qualified leave wages available?

The credits for Eligible Employers for qualified leave wages apply to wages paid with respect to the period of April 1, 2020, through December 31, 2020.

For more information on requirements and eligibility related to paid sick leave and expanded family and medical leave, see the Department of Labor’s Families First Coronavirus Response Act: Questions and Answers.

2. Are wage payments for qualified leave wages made after December 31, 2020, but for periods of leave taken before December 31, 2020, eligible for the credits?

Yes. Notice 2020-21 provides that the payroll credits for paid qualified sick leave wages and paid qualified family leave wages apply to those wages paid for periods beginning on April 1, 2020, and ending on December 31, 2020.

While the wages can only be for periods of leave between April 1, 2020, and December 31, 2020, a payment of qualified leave wages made after the end of this period may nonetheless qualify for the credits if the wages are for leave that an employee took between April 1, 2020, and December 31, 2020. For more information, see Notice 2020-21 (PDF).

Special Issues for Employers: Taxation & Deductibility of Tax Credits

1. What amount does an Eligible Employer receiving tax credits for qualified leave wages, allocable qualified health plan expenses, and their share of Medicare tax on the qualified leave wages need to include in income?

An Eligible Employer must include the full amount of the credits for qualified leave wages, any allocable qualified health plan expenses, and the Eligible Employer’s share of the Medicare tax on the qualified leave wages in gross income.

2. May an Eligible Employer deduct as a business expense an amount paid to an employee for qualified leave wages, allocable qualified health plan expenses, and the Eligible Employer’s share of Medicare tax on the qualified leave wages for which it expects to claim the tax credits?

Generally, an Eligible Employer’s payments of qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer’s share of the Medicare tax on the qualified wages) are deductible by the Eligible Employer as ordinary and necessary business expenses in the taxable year that these wages are paid or incurred.

An Eligible Employer may deduct as a business expense the amounts paid to an employee for qualified leave wages, any allocable qualified health plan expenses, and their share of Medicare tax on the qualified leave wages for which they expect to claim the tax credits under sections 7001 or 7003 of the FFCRA if the Eligible Employer is otherwise eligible to take the deduction.

3. Do the tax credits under sections 7001 and 7003 of the FFCRA reduce the amount deductible as federal employment taxes on an Eligible Employer’s income tax return?

Generally, an employer’s payment of certain federal employment taxes is deductible by the employer as an ordinary, necessary business expense in the taxable year that these taxes are paid or incurred. The amount deductible is generally reduced by credits allowed. Although the tax credits under sections 7001 and 7003 of the FFCRA are allowed against the Eligible Employer’s portion of the social security tax.

The credits are treated as government payments to the employer that must be included in the Eligible Employer’s gross income. If the employer is otherwise eligible to deduct its portion of the social security tax on all wages, the proper amount deductible is the amount of federal employment taxes before reduction by the tax credits.

Special Issues for Employers: Interaction of FFCRA Tax Credits with Other Tax Credits

1. May Eligible Employers receive credits under both section 45S of the Internal Revenue Code and tax credits for qualified leave wages under the FFCRA?

No. There is no double benefit allowed. Under sections 7001(e)(1) and 7003(e)(1) of the FFCRA, any qualified leave wages taken into account for the tax credits may not be taken into account for purposes of determining a credit under section 45S of the Internal Revenue Code.

Thus, an Eligible Employer may not claim a credit under section 45S with respect to the qualified sick leave wages or qualified family leave wages for which it receives a tax credit under FFCRA. It can take a credit under section 45S with respect to any additional wages paid. Provided the requirements of section 45S are met with respect to the additional wages.

Special Issues for Employers: Use of Third-Party Payers

1. Can an Eligible Employer that uses a third party to report & pay federal employment taxes to the IRS get the credits?

Yes, if an Eligible Employer is otherwise eligible to receive the credits, the common law employer is entitled to the credits. Regardless of whether it uses a third-party payer, such as a professional employer organization (PEO), certified professional employer organization (CPEO), or agent to report and pay its federal employment taxes.

The third-party payer is not entitled to the credits with respect to the wages it remits on the Eligible Employer’s behalf. Regardless of whether the third party is considered an “employer” for other purposes of the Internal Revenue Code (the “Code”). If an Eligible Employer uses a third party to file, report, and pay federal employment taxes, certain rules for claiming or reporting the credits apply depending on the type of third-party payer the Eligible Employer uses.

If an Eligible Employer uses a CPEO or a 3504 agent to report its federal employment taxes on an aggregate Form 941, Employer’s Quarterly Federal Tax Return, the CPEO or 3504 agent reports the credits on its aggregate Form 941 and Schedule R, Allocation Schedule for Aggregate Form 941 Filers, that it already files.

An Eligible Employer can submit its own Form 7200, Advance of Employer Credits Due To COVID-19, to claim the advance credit. The Eligible Employer needs to provide a copy of Form 7200 to the CPEO or 3504 agent so the CPEO or 3504 agent can properly report the credit on Form 941.

If an Eligible Employer uses a non-certified PEO to report and pay its federal employment taxes, the PEO will need to report the credits on an aggregate Form 941 and separately report the credits allocable to the employers for which it files Form 941 on an accompanying schedule R. The PEO does not need to complete Schedule R with regard to employers for which it is not claiming credit.

The Eligible Employer needs to provide a copy of any Form 7200 that is submitted for an advance to the PEO so it can properly report the credit on Form 941. These rules are similar to the rules that apply with regard to the payroll tax election available under section 41(h) of the Code for the credit for certain research and development expenses.

Special Issues for Employers: Other Issues

1. Can employees make salary reduction contributions from the amounts paid as qualified leave wages for their employer-sponsored health plan, a 401(k), other retirement plans, or any other benefits?

The FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee’s standpoint as a taxpayer; thus, the same rules that generally apply to an employee’s regular wages or compensation, for RRTA purposes apply from the employee’s standpoint.

To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.

2. Should Eligible Employers withhold federal employment taxes on qualified leave wages paid to employees?

Yes. Qualified leave wages are wages subject to withholding of federal income tax and the employee’s share of social security and Medicare taxes. They are also considered wages for purposes of other benefits that the Eligible Employer provides, such as contributions to 401(k) plans.

3. May a tax-exempt employer receive the credits?

Yes. The FFCRA entitles Eligible Employers that pay qualified sick leave wages and qualified family leave wages to refundable tax credits. Qualified sick leave wages and qualified family leave wages are those wages for paid sick leave, paid family, and medical leave required to be paid under the FFCRA.  Tax-exempt organizations required to provide such paid sick leave, expanded paid family, and medical leave may claim the tax credits.

Special Issues for Employees

1. Are qualified sick leave wages & qualified family leave wages taxable to employees?

Yes. Under sections 7001(c) and 7003(c) of the FFCRA, qualified leave wages are wages as defined in section 3121(a) of the Internal Revenue Code (the “Code”) and compensation as defined in section 3231(e) of the Code. The employee must pay social security and Medicare taxes. For railroad employees, Tier II of the Railroad Retirement Tax Act tax.

In addition, wages are generally compensation for services subject to income tax under section 61 of the Code and federal income tax withholding under section 3402 of the Code unless an exception applies. The FFCRA did not include an exception for qualified leave wages from income.

2. Are qualified sick leave wages and qualified family leave wages excluded from gross income as “qualified disaster relief payments”?

No. Section 139 of the Internal Revenue Code (Code) excludes from a taxpayer’s gross income certain payments to individuals to reimburse or pay for expenses related to a qualified disaster (“qualified disaster relief payments”).

Although the COVID-19 outbreak is a “qualified disaster” for purposes of section 139 of the Code, qualified leave wages are not excludible qualified disaster relief payments. Qualified leave wages replace wages or compensation that an individual would otherwise earn, rather than serve as payments to offset any particular expenses that an individual would incur due to COVID-19.

Section 139(c)(2) of the Code provides that for purposes of section 139 of the Code, the term “qualified disaster” includes a federally declared disaster, as defined by 165(i)(5)(A) of the Code. The COVID-19 pandemic is a “federally declared disaster,” as defined by section 165(i)(5)(A) of the Code. On March 13, 2020, the President of the United States issued a Proclamation declaring a national emergency concerning the Novel Coronavirus Disease (COVID-19) outbreak stating that the ongoing COVID-19 pandemic warrants an emergency determination.

Under section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 – 5207, A “qualified disaster relief payment” is defined by section 139(b) of the Code to include any amount paid to or for the benefit of an individual to reimburse or pay reasonable, necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.  Qualified disaster relief payments do not include income replacements such as sick leave or other paid time off paid by an employer.

3. Can an employee receive both “qualified sick leave wages” and “qualified family leave wages”?

Yes, but at different times. Qualified sick leave wages are available for up to 80 hours during which an employee cannot work or telework for any of six reasons related to COVID-19. Including because the employee must care for their child whose school closed or childcare provider is unavailable, due to COVID-19 related reasons.

By contrast, qualified family leave wages are available only because the employee must care for their child whose school closed or childcare provider is unavailable, due to COVID-19 related reasons. Only after an employee has been unable to work or telework for this reason for 80 hours.

Example:

Your childcare provider is unavailable indefinitely due to the COVID-19 outbreak. You cannot work or telework to care for your child. For up to the first 80 hours of any period of leave to care for your child, you can claim qualified sick leave wages, up to $200 per day and $2,000 in the aggregate. After that, you are entitled to qualified family leave wages for up to ten weeks of additional leave you need, up to $200 per day and $10,000 in the aggregate.

Specific Provisions Related to Self-Employed Individuals

1. Who is an eligible self-employed individual for purposes of the qualified sick leave credit and the qualified family leave credit?

An eligible self-employed individual is defined as an individual who regularly carries on any trade or business within the meaning of section 1402 of the Code. They would be entitled to receive qualified sick leave wages or qualified family leave wages under the FFCRA if they were an employee of an Eligible Employer subject to the requirements of the FFCRA.

Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”

2. How is the “qualified sick leave equivalent amount” for an eligible self-employed individual calculated? 

For an eligible self-employed individual who cannot work or telework because they:

1. Are subject to a Federal, State, or local quarantine or isolation order related to COVID-19
2. Were advised by a health care provider to self-quarantine due to concerns related to COVID-19 or
3. Experience symptoms of COVID-19 and seek a medical diagnosis

Qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons. Multiplied by the lesser of $511 or 100% of the “average daily self-employment income” of the individual for the taxable year.

For an eligible self-employed individual who cannot work or telework because they:

1. Care for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19
2. Were advised by a health care provider to self-quarantine due to concerns related to COVID-19
3. Care for a child if the child’s school closed or childcare provider is unavailable due to COVID-19 precautions
4. Experience any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor

Qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons.

Multiplied by the lesser of $200 or 67% of the “average daily self-employment income” of the individual for the taxable year. In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is 10.

Note: 

The only days that may be taken into account in determining the qualified sick leave equivalent amount are days occurring during the period beginning on April 1, 2020, and ending on December 31, 2020.

3. How is the “average daily self-employment income” for an eligible self-employed individual calculated?

Average daily self-employment income is an amount equal to the net earnings from self-employment for the taxable year divided by 260. A taxpayer’s net earnings from self-employment are based on the gross income that they derived from a trade or business minus ordinary, necessary expenses.

4. How is the “qualified family leave equivalent amount” for an eligible self-employed individual calculated? 

The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days up to 50 during the taxable year that the self-employed individual cannot perform services for which they would be entitled to paid family leave.

If the individual were employed by an Eligible Employer, multiplied by the lesser of two amounts:

1. $200
2. 67% of the average daily self-employment income of the individual for the taxable year

5. Can a self-employed individual receive both qualified sick or family leave wages and qualified sick or family leave equivalent amounts?

Yes, but the qualified sick or family leave equivalent amounts are offset by the qualified sick or family leave wages. If an eligible self-employed individual receives qualified sick leave wages as an employee of an Eligible Employer, that individual’s qualified sick leave equivalent amount must be reduced to the extent that the sum of the qualified sick leave equivalent amount and the qualified sick leave wages received exceeds:

• $5,110 in the case of any day any portion of which is paid sick time for when the individual is:
  1. Subject to a Federal, State, or local quarantine or isolation order related to COVID-19
  2. Advised by a health care provider to self-quarantine due to concerns related to COVID-19
  3. Experiencing symptoms of COVID-19 and seeking a medical diagnosis.

• $2,000 in the case of any day any portion of which is paid sick time for when the individual is:
  1. Caring for an individual subject to a Federal, State, or local quarantine or isolation order related to COVID-19
  2. Advised by a health care provider to self-quarantine due to concerns related to COVID-19
  3. Caring for a child if the child’s school or place of care has been closed, or child care provider is unavailable due to COVID-19 precautions
  4. Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor

Example:

Assume that an eligible self-employed individual’s qualified sick leave equivalent amount is $1,500, but the individual also works for an Eligible Employer and received qualified sick leave wages of $1,000 to care for the individual’s child while school was closed due to COVID-19.

The individual’s qualified sick leave equivalent amount would be reduced by $500 [i.e., ($1,500 + $1,000) – $2,000]. Resulting in a credit for the qualified sick leave equivalent of $1,000 [i.e., $1,500 – $500].

If an eligible self-employed individual receives qualified family leave wages, the individual’s qualified family leave equivalent amount must be reduced to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages received exceeds $10,000.

Example:

Assume that an eligible self-employed individual’s qualified family leave equivalent amount is $5,000. The individual also works for an Eligible Employer and received qualified family leave wages of $9,000 to care for the individual’s child while school was closed due to COVID-19.

The individual’s qualified family leave equivalent amount would be reduced by $4,000 [i.e., ($5,000 + $9,000) – $10,000]. Resulting in a credit for the qualified family leave equivalent of $1,000 [i.e., $5,000 – $4,000].

6. How does a self-employed individual claim the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts?

The refundable credits are claimed on the self-employed individual’s Form 1040, U.S. Individual Income Tax Return for the 2020 tax year.

7. How can a self-employed individual fund their qualified sick leave equivalent and qualified paid family leave equivalent amounts before filing Form 1040?

The self-employed individual may fund sick leave and family leave equivalents by taking into account the credit to which the individual is entitled. They claim on Form 1040, U.S. Individual Income Tax Return, in determining required estimated tax payments.

This means that a self-employed individual can effectively reduce payments of estimated income taxes that the individual would otherwise be required to make if the individual was not entitled to the credit on Form 1040.

Where can I get more information?

• Coronavirus Tax Relief
• Department of Labor’s COVID-19 and the American Workplace