Brittney emailed you on April 8th regarding the Family and Sick Leave credits for COVID-19. We have heard from one of our employers since then but frequent phone conversations with our clients have revealed that many of you are not aware of how this impacts you and your employees. Some of you have told us you are paying sick leave to employees because they have been ordered to stay home due to COVID-19. We can help you when this happens. Therefore, we want to send another email to further explain how this Act works.
- If you have an employee that cannot work due to COVID-19 you must pay the employee for COVID-19 sick leave and you can receive a tax credit for doing so.
- If you have an employee that must stay home to care for someone due to COVID-19 such as sick family member or care for children due to school / nursery closing you must pay the employee for COVID-19 Care of Others and you can receive a tax credit for doing so.
If you don’t read any further than this, please act now and contact our office if either of these events are happening in your company.
These are trying times for small business owners; for many, the continued viability of their life’s work is in doubt on a daily basis. In recent weeks, Congress has done its part, enacting well in excess of $2 trillion in relief measures, many targeted specifically at those businesses with fewer than 500 employees. Well-intentioned as the relief may have been, it has created no shortage of confusion, as some provisions force employers to pay family and sick leave wages that were previously not required, while others create new categories of payroll tax credits.
Making matters more confusing, recent guidance from the IRS governing the new payroll tax credits has differed wildly from the underlying legislative text. The guidance, however, has been VERY favorable to small employers; thus, it’s vital that all business owners are aware of the opportunities being afforded to them to maximize cash over the coming weeks and months.
Let’s take a look at the two new payroll credits created in the past month — credits for paying mandated family and sick leave related to COVID-19 — before then examining how guidance from the IRS will allow employers to reap the benefit of those credits much sooner than the new law originally allowed.
Family and Sick Leave Credits
As part of the Coronavirus Relief Act, Congress modified the Family and Medical Leave Act of 1993 to require employers with fewer than 500 employees to pay 10 weeks of family leave and two weeks of sick pay to eligible employees impacted by COVID-19.
There are two types of leave that are very distinct. These rules have already taken effect, and on a high level, they work like this:
Any employee who has been employed for at least 30 days is required to receive 12 weeks of leave —the last 10 of which must be paid — related to COVID-19 for one reason and one reason only: the employee is “unable to work (or telework) due to a need for leave to care for the son or daughter under 18 years of age of such employee if the school or place of care has been closed, or the child care provider of such son or daughter is unavailable due to a public health emergency.”
As a result, an employee is NOT required to receive paid leave because the business shut its doors — voluntarily or at the behest of the government — or because the employee has been temporarily furloughed. In fact, an employee isn’t even entitled to 10 weeks of paid leave when the EMPLOYEE gets sick; rather, the leave is reserved for a situation where the employee must care for a minor child.
Any employee that fits that description is entitled to 12 weeks of leave. The first two weeks of leave can be unpaid, or the employee can elect to use accrued vacation or sick time. Alternatively, as we’ll see below, the employee could receive two weeks of required sick pay during that stretch. After the first two weeks, however, the Act requires that the next 10 weeks of family leave MUST be paid, and must be paid based on the number of hours the employee would work during that period at 2/3 of the employee’s regular rate of pay. The required family leave is capped, however, at $200/day per employee and $10,000 in the aggregate.
Lastly, family pay is not subject to the employer’s 6.2% share of the Social Security tax.
Example. On April 1, 2020, A takes 12 weeks of leave from his job at X Co. to take care of A’s 12-year old son, whose school has been shut down by COVID-19. A would normally work 400 over a ten-week period, and his regular rate of pay is $24/hour.
For the ten weeks, A is required to be paid at least $16/hour for the full 400 hours. This is pay of $128/day, which does not exceed the limit of $200/day, and total compensation of $6,400, which does not exceed the aggregate cap of $10,000. Thus, A is paid $6,400 for the final 10 weeks of his 12 week leave.
(This has been the most common leave request for our clients)
The Coronavirus Relief Act also permits any employee — regardless of length of service — to receive two weeks (80 hours) of paid sick leave if the employee is:
- Subject to a Federal, State, or local quarantine or isolation order related to COVID-19.
- Advised by a health care 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 who is subject to quarantine or has been advised to self-quarantine.
- Caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions.
- Experiencing any other substantially similar condition.
It’s best to view these six reasons as being broken into two distinct categories that will influence the required rate of pay, and ultimately, the amount of the employer’s tax credits: Reasons 1-3 address when something is wrong with the EMPLOYEE, while reasons 4, 5, and 6 address those situations where the employee is required to care for SOMEONE else.
If the sick pay is based on reasons 1-3, it is paid at the employee’s regular rate for 80 hours (for a full-time employee). The compensation is capped, however, at $510/day and $5,110 in the aggregate.
If sick pay is made for the latter three reasons, the 80 hours is paid at 2/3 of the employee’s regular rate. Sick pay, like family pay, is not subject to the employer’s share of Social Security tax.
Example. Continuing the example above, on April 1, B takes two weeks of sick leave from X Co. because her doctor asked her to self-quarantine after being exposed to someone with COVID-19. B’s regular rate of pay is $30/hour. Because this is reason #2 for leave — something is wrong with the EMPLOYEE — X Co. is required to pay B her full rate of pay, or $2,400. Because this amount does not exceed the aggregate cap of $5,110, B is paid the full amount
Employer Payroll Credits
It may strike you as odd that Congress would force employers to make additional wage payments during a time when most are struggling to fund their standard payroll. The idea, however, is that payment of the family and sick leave should come at no net cost to the employers.
This result is achieved through two new payroll tax credits: effectively, an employer required to pay family or sick leave is allowed to claim a credit against the employer’s 6.2% share of the Social Security taxes paid on all wages. Any credit in excess of this amount is fully refundable.
The credit is increased by the employer’s group health care costs allocable to the family and sick leave paid, and is also increased by the employer’s 1.45% share of Medicare tax. To prevent double dipping, the employer must reduce its deduction for wages by the amount of the credit it receives (in other words, the employer will not receive both a deduction and a credit for the family and sick leave wages paid).
Example. Building on our continuing example, X Co. is required to pay $6,400 in family leave to A and $2,400 in sick leave to B. Assume that X Co.’s health care costs allocable to those wages was $200. In addition, X Co. pays $127 in Medicare taxes on the $8,800 in wages.
As a result, X Co. is entitled to a credit against its 6.2% share of Social Security taxes on ALL wages paid of $9,127, the exact amount X Co. was required to pay in family and sick wages, payroll tax, and allocable health care costs. Under normal procedures, X Co. would make all of its normal payroll deposits, and when it files its quarterly Form 941, claim a credit and request for refund of $9,127.
Tomorrow, we will write more about a third payroll tax credit that may benefit you as well, the Employee Retention Credits.
Source: Tony Nitti, Senior Contributor for Forbes
Important: If you don’t take anything else from this article, please let us know when you have an employee that is requesting COVID-19 leave. We will help you track the leave so you can pay your employee properly AND receive the tax credit.