As employers learn about the paid-leave requirements under the Families First Coronavirus Response Act (FFCRA) and corresponding tax credits, misconceptions have arisen related to such details as when to claim the credits and which employers are eligible to claim them.
The FFCRA requires employers with fewer than 500 employees to provide up to 80 hours of emergency paid sick leave and up to 12 weeks—10 of which are paid—of Emergency Family and Medical Leave Expansion Act time off to employees who can’t work for specific reasons relating to the COVID-19 pandemic. “Under the FFCRA, the federal government will reimburse employers for the cost of this leave by way of refundable tax credits,” said Jim Paretti, an attorney with Littler’s Workplace Policy Institute in Washington, D.C.
Eligible employers can claim refundable tax credits under the FFCRA for all or part of the cost of providing qualified paid-sick or family leave taken from April 1 through Dec. 31, noted Dasha Brockmeyer, an attorney with Saul Ewing Arnstein & Lehr in Pittsburgh.
When to File
Some employers believe they must wait until the end of the quarter or end of the year to claim the credits, said Asel Lindsey, an attorney with Dykema in San Antonio.
Eligible employers claim the FFCRA tax credit by retaining payroll taxes—federal income taxes and Social Security and Medicare taxes—that would otherwise be deposited with the IRS, she said. If the retained payroll taxes are insufficient to cover the full amount of the tax credit, employers can file a request with the IRS on Form 7200 for an accelerated payment. Form 7200 can be filed before the end of the month following the calendar quarter in which the qualified sick- or family-leave payments were made.
Nonetheless, the form may not be filed later than the date on which the employer files the Form 941 for the fourth quarter of 2020, which generally is due Jan. 31, 2021, she said.
“If an eligible employer receives tax credits for qualified leave wages, those wages will not be eligible as payroll costs for purposes of receiving loan forgiveness under the CARES [Coronavirus Aid, Relief, and Economic Security] Act,” said Carrie Hoffman, an attorney with Foley & Lardner in Dallas.
Additional common misconceptions concern the eligibility for or availability of the FFCRA paid-leave tax credits, according to Robert Delgado, KPMG’s principal-in-charge of tax compensation and benefits in San Diego, and Katherine Breaks, KPMG’s tax principal in Washington, D.C. They include these incorrect assumptions:
- The group aggregation rules for determining whether an employer is eligible for the paid-leave tax credits under the FFCRA are the same for determining employer eligibility for other COVID-19-related relief, such as the employee retention credit under the CARES Act. While some employers assume that the group aggregation rules used to determine eligibility for the paid-leave tax credits are driven by tax rules, they actually are defined by the labor rules and outlined in U.S. Department of Labor guidance, as the tax credit is secondary to the requirement to provide paid leave. Under these rules, a corporation is typically considered to be a single employer but must be aggregated with another corporation if considered joint employers under the Fair Labor Standards Act rules with respect to certain employees or if they meet the integrated employer test under the Family and Medical Leave Act (FMLA).
- Employers must choose between claiming tax credits for paid leave under the FFCRA or for wages paid to employees under the employee retention credit, but they may not claim both. In fact, eligible employers may receive tax credits available under the FFCRA for required paid leave, as well as the employee retention credit, but not for the same wage payments. Similarly, employers can provide both qualified sick-leave wages and qualified family-leave wages and claim a tax credit for both, but not for the same hours. Employers may not receive a double benefit by claiming a tax credit under Section 45S taking into account the same qualified leave wages.
Delgado and Breaks stated that other misconceptions include the following:
- The tax credit is limited to the qualified wages an employer must pay to an employee under the FFCRA for emergency paid sick leave and expanded FMLA. In fact, the tax credit is generally equal to 100 percent of the qualified wages an employer must pay under the FFCRA for emergency paid sick leave and expanded FMLA increased by the employer’s share of Medicare owed on the wages, as well as any qualified health plan expenses.
- An employer may not receive tax credits for FFCRA-required paid leave if it receives a Small Business Administration Paycheck Protection Program loan. Actually, an employer may receive tax credits for paid leave under the FFCRA, as well as a Small Business Administration Paycheck Protection Program loan, but the qualified wages are not eligible as payroll costs for the purposes of loan forgiveness.
- Employers can exclude the amount of the paid-leave tax credit from gross income. In fact, employers must include the full amount of the credits in gross income—that is, qualified leave wages plus any allocable qualified health plan expenses and the employer’s share of the Medicare tax on the qualified leave wages. But employers may deduct the amount paid for emergency paid sick leave and expanded FMLA as an ordinary and necessary business expense in the taxable year paid or incurred, including wages for which they expect to take a tax credit.
“If an employer fails to claim a paid-leave tax credit on their Form 941 for the applicable quarter in which the leave wages are paid, the employer can submit a Form 941-X to reflect the corrections, including eligibility for the credit,” Delgado and Breaks also noted.