New Tax Credits for Employers for Coronavirus Paid Sick Leave Benefits
Sick Leave for Employees Caring for Self and Family During the Pandemic
The Families First Coronavirus Response Act (FFCRA) was signed into law by President Trump on March 18, 2020 to help employers provide sick leave benefits to employees. This law directly affects small and midsize employers (those with fewer than 500 employees) who give paid sick leave to employees for their own illness or to care for family members. The FFCRA also includes similar credits for self-employed individuals.
These new paid leave requirements and tax credits apply to leaves taken between April 1, 2020 and December 31, 2020.
Tax Credits for COVID-Related Sick Pay and Sick Leave
The Emergency Paid Sick Leave Act (EPSLA) requires employers to give workers up to 80 hours of paid sick time for Coronavirus-related reasons. The Expansion of the Family Medical Leave Act (Expanded FMLA) entitles workers to certain paid family and medical leave.
Employers Eligible for Tax Credits
An eligible employer is a business or tax-exempt organization with fewer than 500 employees that's required to provide emergency paid sick leave and emergency paid family and medical leave under this new law.
Employees on leave, temporary employees, and temporary employees with a continuing employment relationship are included. Independent contractors (as defined by the Dept. of Labor) aren't considered employees for the 500-employee threshold.
Employers Exempt from FFCRA Requirements
Small businesses with under 50 employees are exempt from providing paid sick leave for child care or expended family and medicare leave due to COVID-19 related reasons when this would jeopardize the viability of the small business as a growing concern. The Dept. of Labor has specific requirements for claiming this exemption.
Sick Leave and Child Care Leave Benefits to Employees
These are benefits that employers must provide:
Paid Sick Leave for Employees
Employees of eligible employers can get up to 80 hours (two weeks) of paid sick leave at 100% up to $511 per day, or $5,110 in total if the employee can’t work because of one or more of these situations:
- COVID-19 symptoms
- Seeking a medical diagnosis
Paid Sick Leave for Employees as Caregivers
In addition to the paid sick leave, employees may receive up to 80 hours (two weeks) of paid sick leave at two-thirds of their pay for one or more of these situations:
- Caring for someone in quarantine
- Caring for a child whose school is closed or child care is unavailable
- The employee is experiencing “substantially similar conditions"
Part-time employees may get an amount equal to their average number of hours over a two-week period.
Expanded Child Care Leave
In addition to the sick leave credit, employers may give employees paid leave under the Expanded FMLA to care for a child whose school or place of care is closed or when child care isn’t available. The benefit to employees is two-thirds of the employee’s regular pay for up to 10 weeks, up to $200 a day or $10,000 aggregated.
This part of the law is an expansion of the Family Medical Leave Act (FMLA), which requires larger employers with 50 or more employees to give time off for unpaid leave and allow employees to return to work without penalty.
Tax Credits for Employers
Paid Sick Leave Credit and Caregiver Credit
The tax credit for employee paid sick leave works like this:
- If you are an eligible employer, you may get a refundable sick leave credit for the amounts you paid employees for the paid sick leave above.
- The credit is for the employee’s regular pay, up to $511 per day and up to $5,110 for a total of 10 days.
The tax credit for caregivers works like this:
- If you are an eligible employer, you can claim a credit for the caregiver leave pay you gave to employees, as described above.
- The credit is for two-thirds of the employee’s regular pay, up to $200 a day and $2,000 for up to 10 days.
Paid Family Leave Refundable Credit
The Family and Medical Leave Act (1993) requires employers with 50 or more employees to provide up to 12 weeks of unpaid leave each year for certain medical conditions, for either the employee or caring for a family member. Effective for 2018 tax years, an FMLA tax credit has been available for businesses that give employees paid family leave benefits.
The FFCRA has extended Family and Medical Leave Act credit for employers. who give paid family leave to employees who need to care for a child whose school or child care is closed or whose child care provider is unavailable due to the coronavirus. The credit is for up to 10 weeks at two-thirds of the employee’s regular pay, up to $200 a day or $10,000 total.
The IRS has published a flowchart to help you figure out the Sick Leave/Family Leave Tax Credits and the Employee Retention Tax Credit. You can use both credits, but not for the same wages.
How to Take the Tax Credits
The IRS requires employers to withhold federal income taxes and FICA taxes (Social Security/Medicare tax) from employee paychecks and to pay these taxes to the IRS along with an amount for the employer portion of FICA taxes. You withhold federal income tax based on the employee’s W-4 form. The FICA tax combined for employees and employers totals 15.3% of the employee’s gross pay for both Social Security and Medicare.
You can take a fully refundable tax credit equal to the required sick leave you paid to each employee for both the sick leave credit and also for the family leave credit. You can also include your employer's share of Medicare tax on those wage payments and the cost of maintaining health insurance coverage for the employee during their sick leave. You don't have to pay your employer portion of the Social Security portion of FICA taxes on those wages.
How to Report the Tax Credits
You can report your qualified leave wages and related credits on your quarterly report (usually Form 941). Form 941 has been updated for 2020 to include the reporting of these credits and advances.
But, you don't have to wait until you file your 941 form to get the credit. You can get access to these credits by using the amounts you have set aside for payment, by reducing your federal employment tax deposits (for federal income taxes and FICA taxes) by the amount of the credit, or by requesting an advance from the IRS.
Tax Credits for Self-Employed Individuals
Self-employed individuals are those who regularly work for themselves (not as employees), including telework for up to 10 days during the year. The tax credit is an offset from the person's self-employment tax (Social Security/Medicare).
The IRS says self-employed business owners are:
- Sole proprietors or independent contractors,
- Members of a partnership, or are
- Otherwise in business for themselves (including part-time businesses).
Two different kinds of tax credits are available for COVID-19 related reasons:
Leave for individuals. This leave is based on the number of days during the tax year that the person can't work for Coronavirus reasons:
- Subject to a federal, state, or local quarantine or isolation order
- Has been advised by a health care provider to self-quarantine
- Showing symptoms of COVID-19 and is seeking a medical diagnosis
The amount of the tax credit is up to 100% of the person's average daily self-employment income for the year, to a maximum of $411.
Leave to Care for Family. This leave is for a self-employed individual who can't work or telework because they are caring for someone else for these of COVID-19-related reasons:
- Caring for someone who is subject to a federal, state, or local quarantine or isolation order
- Caring for a child if the child's school is closed or child care isn't available
- Is experiencing any other substantially similar condition
The amount, in this case, is equal to the number of days when the individual can't do their normal work for the above reasons multiplied by 67% of their average daily self-employment income up to 10 days, up to a maximum of $200.
The Bottom Line
The Families First Coronavirus Response Act is a relief bill that requires small employers—those with fewer than 500 employees—to provide limited paid-leave benefits to employees who are affected by the coronavirus emergency.
To pay for the new mandatory benefits, small employers are given new tax credits and federal payroll-tax relief.
These provisions will apply from the effective date through December 31, 2020. For more information and official updates, consult regularly with the IRS and U.S. Department of Labor websites.