The IRS has updated its guidance for employers about how to claim tax credits for wages paid under the Families First Coronavirus Response Act (FFCRA). [Note: this article does not address self-employed individuals, who should consult the IRS guidance directly.] We first told you about the original guidance in our April newsletter. Generally speaking, covered employers are entitled to tax credits for 100% of the wages paid to employees (plus the employer’s share of Medicare taxes and any qualified health plan expenses allocable to those wages) when the employee takes COVID-19 related sick leave or family leave (when the employee’s child’s school or childcare is closed or operating remotely because of COVID-19) provided under the FFCRA.

The FFCRA expired December 31, 2020, but recent legislation allows covered employers to choose to apply the Paid Sick Leave and/or the Expanded Family Medical Leave benefit provisions of the FFCRA through March 31, 2021, and continue using these tax credits through that time.

The IRS updates, which do not address first quarter 2021 issues, include:

• In addition to withholding the amount of qualified leave wages from their quarterly federal employment tax deposits that would otherwise be submitted to the IRS (which keeps the credit amounts in the employers’ hands from the get-go), employers may also claim the credits in their annual federal employment tax returns. Employers may request an advance of the credit from the IRS using Form 7200, and (prior to retaining deposits in anticipation of the credit), may defer the deposit and payment of the employer’s share of social security taxes and/or may defer withholding and payment of the employee’s share of social security tax on certain wages paid between September 1 and December 31, 2020. Any Form 7200 must be submitted by the date the employer files for the fourth quarter of 2020, not later than February 1, 2021.
• A reminder that there is no credit for the employer’s portion of the social security taxes on any qualified leave wages because those wages are not subject to the tax to begin with. So, for example, an employer pays $10,000 in qualified leave wages in Q3 2020. It does not owe the employer’s share of social security tax on the $10,000, but it will owe $145 for the employer’s share of Medicare tax. Thus, the employer’s credit amount equals $10,145 (plus any qualified health plan expenses allocable to the qualified leave wages)
• Clarification (consistent with other Department of Labor guidance on this issue) that an employer is entitled to the tax credit for leave wages paid to an employee who was needed to care for a child because the child’s summer camp or summer program was closed or unavailable due to COVID-19.
• A covered employer may receive both the tax credits for qualified leave wages under the FFCRA and also a Paycheck Protection Loan (PPP) under the CARES Act, but if the employer receives tax credits for qualified leave wages, those wages are not eligible as payroll expenses for purposes of receiving PPP loan forgiveness.
• A reminder that only private employers with fewer than 500 employees are entitled to the tax credits. The federal government, state or local governments, and any governmental “instrumentalities” or agencies are not entitled to receive tax credits for providing paid leave wages under the FFCRA (though most government employers are required to provide the paid leave in some capacity). Tribal governments that provide paid leave wages under the FFCRA are eligible to claim the tax credits, assuming they are otherwise covered employers. Tax-exempt employers who are required to provide paid leave under the FFCRA may also claim the tax credits.
• Whether an organization is considered a governmental “instrumentality”—as discussed in the previous bullet point—depends on six factors relating to the purpose and control of the organization and public versus private considerations therein.
• Employers may claim tax credits when they are required to provide paid leave under the FFCRA to household workers (such as landscaping, cleaning, and childcare).
• Employers cannot claim tax credits for any amounts paid to H-2A visa holders, because such wages are not subject to FICA.
• Qualified leave wages for purposes of the IRS credit are calculated without regard to federal taxes imposed on or withheld from the wages, including the employee’s share of social security taxes, the employee’s and employer’s shares of Medicare tax, and federal income taxes required to be withheld.
• The amount of qualified health plan expenses taken into account in determining the amount of IRS credits generally include both the portion of the cost paid by the employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions, but should not include amounts that the employee paid for with after-tax contributions. The credit also does not include any employer contributions to employee health savings accounts.
• If an employer mistakenly did not pay an employee qualified leave wages when the employee was otherwise entitled, the employer may pay such wages at a later date and may claim the tax credit once the wages have been paid, as long as it relates to leave between April 1 and December 31, 2020.
• Employers may still be entitled to a credit if wage payments were made after December 31, 2020, as long as wages relate to qualified leave taken between April 1 and December 31, 2020.
• If the amount of paid sick leave or paid family leave an employer pays to an employee is otherwise exempt from social security and Medicare taxes, the employer cannot claim any tax credit for paying that amount to the employee.
• Like other wages, covered employers must report the amount of qualified sick and family leave wages paid to employees under the FFCRA on the employee’s annual W-2. The IRS has provided employers optional language to use in the Form W-2 instructions for employees.
• Qualified leave wages under the FFCRA are subject to withholding of federal income tax and the employee’s share of social security and Medicare taxes, and such amounts should be withheld by the employer. Qualified leave wages are also considered wages for the purposes of other benefits provided by the employer, such as 401(k) contributions.
• Employers may elect not to claim these tax credits even if they are otherwise entitled to do so. But, even if the employer does not claim the tax credit, covered employers are still required to provide employees with paid leave under the FFCRA.
• Employers are generally not entitled to claim tax credits for providing paid leave to an employee under the employer’s own policy; an employer is entitled to tax credits for paid leave only to the extent it is required to be paid under the FFCRA.

The IRS documentation requirements discussed in our April newsletter remain the same, though an employer may choose to require information from employees in addition to that described by the IRS.

As with all IRS matters, we encourage you to work with your accountant and/or tax counsel if you have specific questions.

By Rebecca D. Bullard, rbullard@dsda.com