IRS Releases New FAQ Regarding Employer Tax Credits for FFCRA
The IRS has disseminated a new FAQ to help employers claim the tax credits connected to providing mandatory emergency leave under the Families First Coronavirus Response Act (FFCRA). This FAQ came with a bounty of important information and clarifications for employers who may have been confused by the broad language and legalese in the bill itself.
As a reminder, the FFCRA provides eligible employees with an expanded FMLA and Emergency Paid Sick Leave, both of which provide for compensated leave. The employer must pay this compensation as wages and must maintain the employee’s health insurance for the duration of the leave. To compensate employers for this expense, the government provides these employers with tax credits when an employer is required under law to pay wages to an employee on FFCRA leave.
What Do These Tax Credits Cover?
These tax credits cover 100% of up to 10 days of the qualified sick/family leave wages outlined in the FFCRA. These credits will also cover the Medicare taxes imposed on these wages . The tax credit also covers the employer’s share of maintaining health insurance coverage for the employee during the FFCRA-approved leave. Employers are exempt from paying their portion of Social Security taxes on wages paid under this program.
What is Qualified Sick Leave and Qualified Family Leave?
“Qualified” sick leave refers to the following leave reasons:
-Employee is under mandatory quarantine or self-quarantine advised by a health professional;
-Employee has COVID-19 symptoms and is seeking a medical diagnosis;
-Employee is caring for a family member with COVID-19; or
-Employee is caring for a child whose school or place of care has been closed down due to COVID-19
“Qualified” family leave refers to the following leave reasons:
Employee is caring for a child whose school or place of care has been closed down due to COVID-19
How Does an Employer Receive FFCRA Tax Credits? If I Cannot Receive the Credits in Time, How Do I Pay Employees?
Eligible employers must claim these tax credits on their Quarterly Tax Returns (Form 941). If an employer requires additional funds to pay for qualified leave under the FFCRA, the employer may dip into federal tax deposits (federal employment taxes otherwise sent to the IRS). These funds need not be re-paid, as they will be deducted from any potential tax credits.
Should an employer find itself in a position of being unable to pay employees for the mandated leave, then the employer may request an advance of its tax credits by using Form 7200 (to be faxed to 855-248-0552).
What Are My Recordkeeping Requirements?
An employer will need to prove that it is eligible for these tax credits using documentation from both its own internal processes and from its employees.
In order to substantiate eligibility for credits, the employer will need the following information from each employee who wishes to go out on leave:
-Date or dates for which leave is requested;
-A statement of the COVID-19 related reason for the leave and any supporting documents;
-A statement that the employee cannot work (including telework) because of this reason;
-Name of government entity ordering quarantine (if applicable); and/or
-Name of the school or care center that was shut down, along with an attestation that no other entity will be caring for the child during the leave (if applicable)
The employer will also need to record the following information from its own records:
-Documentation to show how the employer determined the amount to be paid to the employee (hours of work, wages paid, leave paid)
-Documentation to show how the employer determined the amount of qualified health plan expenses to be allocated to wages;
-Copies of any Forms 7200 the employer has submitted to the IRS; and
-Copies of the Form 941 submitted to the IRS
All records should be kept for at least 4 years.
Accrual and Allocation of Tax Credits
As previously stated, employers are eligible for additional tax credits if they maintain a qualified group health plan.
Taxability of Wages Paid
Finally, the IRS clarified certain tax issues that may have caused confusion. Specifically:
The full amount of the tax credits are included in the employer’s gross income;
These wages are taxable to the employee. Employers should withhold federal income taxes and the employee’s share of social security and Medicare taxes.
These wages are not considered “qualified disaster relief payments and are thus are included in employee gross income
You can read the full IRS FAQ HERE.