The Families First Coronavirus Response Act (FFCRA) provides refundable tax credits to businesses with fewer than 500 employees reimbursing them dollar-for-dollar for the cost of providing paid sick and family leave wages related to COVID-19.
Under FFCRA, employees may receive up to 80 hours of paid sick leave for their own health needs and/or may receive an additional 10 weeks of paid family leave to care for a child whose place of child care is closed due to COVID-19 if the employee cannot telecommute.
To cover the cost of this paid leave, eligible employers are entitled to refundable tax credits.
Paid Sick Leave Refundable Credit
An employee who receives paid sick leave under FFCRA can potentially receive up to two weeks (80 hours) at the employee’s regular rate of pay, or, if higher, the Federal minimum wage or applicable state or local minimum wage, up to $511 per day and $5,110 total. An employee who is unable to work due to child-related reasons may receive paid sick leave for up to two weeks (80hours) at 2/3 of the employee’s regular rate of pay, or if higher, The Federal minimum wage or applicable state or local minimum wage, up to $200 per day and $2,000 total.
The employer is entitled to a fully refundable tax credit equal to the required paid sick leave (not more). The tax credit includes the employer’s share of Medicare tax on the wages and the allocable cost of maintaining health insurance for the employee during the sick leave. The employer is not subject to the employer portion of Social Security tax on the wages.
Paid Family Leave Refundable Credit
FFCRA also provides an expanded FMLA leave for an employee who is unable to work or telework due to the need to care for a child whose care is otherwise closed due to COVID-19. The employee may be eligible for paid leave at 2/3 of the employee’s regular pay, up to $200 per day and $10,000 total.
The employer is entitled to a fully refundable tax credit equal to the qualified FMLA leave wages. The tax credit includes the employer’s share of Medicare tax on the wages and the allocable cost of maintaining health insurance for the employee during the sick leave. The employer is not subject to the employer portion of Social Security tax on the wages.
Claiming the Credit
The IRS has a detailed list of questions and answers about qualifying for and taking the tax credit. For more information, click here.
The credit is taken against federal taxes imposed on employees on all wages and compensation paid to employees. If the credit is greater than the employer portion of federal employment taxes, then the excess amount is considered an overpayment and will be refunded to the employer.
The qualified sick leave payments are not subject to employment taxes and employers that pay such wages will be able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allocable qualified health plan expenses, and the amount of the employer’s share of Medicare tax on those wages. The retained federal employment taxes include federal income taxes withheld, the employee’s share of Social Security and Medicare taxes.
It is important to keep records and documentation related to the leave to be able to substantiate any credit claimed.
