COVID-19: Tax Credit Advisory

New Law Allows Tax Credits for Employers Offering Paid Leave to Workers Affected by Covid-19

As part of its response to the coronavirus pandemic, Congress passed the Families First Coronavirus Response Act (the “Act”), which was signed by President Trump on March 18. The Act requires employers with fewer than 500 employees (which the IRS calls “eligible employers”) to offer paid sick leave to its employees, subject to certain exceptions. To reduce the cost to employers of providing leave, the Act also provides eligible employers with an immediate tax credit for providing employees with pay while they are on sick leave or have special child care needs due to COVID-19. The credits are designed to compensate companies for providing up to two weeks of sick time, and up to 10 weeks of parental leave time, to employees affected by COVID-19. And instead of assuring companies that they will get a tax benefit next year, when they file their 2020 tax returns, the Act provides a mechanism to get the benefit immediately. However, there are significant limits on the amount of the credit employers may claim.

The maximum paid sick leave credit available is equal to $5,110 per worker, calculated as $510 per day for ten days of sick leave, plus the cost of health care premiums. For employees who are paid less than $510 per day, the credit is equal to the full amount of the worker’s salary, multiplied by the number of days the employee was unable to work due to coronavirus (but not more than 10), plus an amount calculated to match the cost of the employee’s health care premiums covered by the company for that period.

The credit is not available to governmental employers, even though they are subject to the requirement to provide sick leave. It applies only to workers affected (or potentially affected) by COVID-19; if a company expands it sick leave policy in response to the coronavirus outbreak and an employee takes leave due to some other illness, the credit will not be available with respect to that employee. But the full credit is only available with respect to employees who are unable to work because they are under quarantine or self-quarantine because of exposure to coronavirus, or who have symptoms of COVID-19 themselves.

The Act also requires employers to provide paid sick leave to people who are not working because they are caring for someone who has symptoms of COVID-19, or are caring for children because the child’s school or child care facility is closed due to the outbreak. The paid sick leave tax credit for people taking time off for these reasons is limited to 2/3 of the employee’s salary, capped at $2,000 per worker, or $200 per day for up to 10 work days, plus the cost of health insurance for that period. However, in addition to the credit for paid sick leave, there is also a separate credit for child care leave. The child care leave credit provides a credit of up to 2/3 of the employee’s salary (again, capped at $200 per day) for up to 10 weeks (for a maximum child care leave credit of $10,000 per employee plus health insurance costs).

The procedure for claiming the credits was designed to speed the employer’s recovery of its costs by allowing it to claim the credit out of amounts it would otherwise have to pay to the IRS in the form of employee wage withholding. For instance, if an employer is required to deposit $8,000 in payroll taxes with respect to all of its employees in a given quarter, but one of its employees was required to self-quarantine for two weeks, and the employee gets paid $400 per day (including the cost of health care premiums), the employer could reduce the amount of its payroll tax payment to the IRS by $4,000. If three employees were required to quarantine, all of whom are paid $400 per day, the employer would be entitled to a $12,000 credit, so it would not pay any payroll tax to the IRS that quarter, and would be eligible for a $4,000 refund. The Treasury department is expected to release a form to claim the refund in the coming days.

If you have questions, please contact Dan Pittman. Our office is trying as best we can to work remotely, while continuing to timely and effectively respond to, and anticipate, client concerns.

For more Information: IRS Guidance