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IRS Releases Guidance on How The Tax Credits Work Under The Families First Coronavirus Response Act and Under The CARES Act
Both the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) give eligible employers the opportunity to claim payroll tax credits from the IRS. The purpose of the tax credits is to ease the financial burden of paying qualified employees paid sick leave and paid family leave under FFCRA and to help eligible employers keep up with payroll during these uncertain times.
On March 31, 2020, the IRS issued a flurry of guidance – including a new form for seeking advanced payments on tax credits – to help qualified employers take advantage of these tax credits. Below, we briefly explain how the tax credits work under each law and identify what guidance the IRS has provided to employers to navigate these financial aids.
A. How Tax Credits Work Under FFCRA
1. The FFCRA Tax Credits Help Employers Who are Required to Pay Paid Sick Leave and Paid Family Leave Under FFCRA.
FFCRA requires employers with less than 500 employees – including independent schools – to provide emergency paid sick and paid family leaves to qualified employees impacted by COVID-19. Generally, employers are required to provide up to 80 hours (pro-rated for part-time employees) of Emergency Paid Sick Leave (EPSL). Employees receive their regular rate of pay (subject to a cap at $511 per day/$5,110 total) in EPSL if they are unable to work because they are quarantined (pursuant to governmental order or advice of a health care provider) or are experiencing COVID-19 symptoms and seeking a diagnosis. Employees receive two-thirds of their regular rate of pay (subject to a cap at $200 per day/$2,000 total) in EPSL if they are unable to work due to caring for an individual subject to quarantine (pursuant to a governmental order or advice of a health care provider), due to caring for a child whose school or child care is closed/unavailable due to COVID-19, or due to some other substantially similar condition as may be specified by the Secretary of Health and Human Services from time to time.
Finally, a qualified employee who is unable to work due to caring for a child whose school or child care is closed due to COVID-19 is also entitled to receive up to 10 weeks of paid Public Health Emergency Family Leave (“EFMLA”), paid at two-thirds their regular rate of pay (subject to a cap at $200 per day/$10,000 in total). Please see our COVID-19 landing page for more detailed articles and guidance on these FFCRA’s paid leave requirements: https://www.lcwlegal.com/responding-to-COVID-19.
To help off-set the financial burden of providing these mandated leave benefits to employees, FFCRA (as amended by the CARES Act) also includes fully refundable payroll tax credits.
2. The FFCRA Tax Credits are Equal to 100% of Paid Sick Leave and Paid Family Leave Paid to Employees Under FFCRA, Plus Related Health Plan Expenses and the Employer’s Share of Medicare Taxes.
The amount of the FFCRA tax credits equals the amount of EPSL and EFMLA paid to employees between April 1, 2020 and December 31, 2020, unless FFCRA is extended or modified. Thus, credits covers up to ten days of EPSL and up to ten weeks of the EFMLA for each employee, subject to the caps on payment (i.e., $511 per day/$5,110 in aggregate or $200 per day/$2,000 in aggregate). Employers may pay EPSL and EFMLA at rates in excess of the caps, but the excess cannot be claimed as a credit. However, employers may also include in the credit the amount of health plan expenses allocable to the EPSL and EFMLA payments (excluding amounts that the employee paid for with after-tax contributions), plus the amount of the eligible employer’s share of Medicare taxes imposed on those payments.
3. The Amount of FFCRA Tax Credits Can be Used to Reduce an Employers’ Payroll Taxes.
For the FFCRA tax credits, an eligible employer is an employer with less than 500 employees required to provide EPSL and EFMLA (excluding public employers). An eligible employer may receive a credit for the wages paid for EPSL and EFMLA, (including qualified health plan expenses and the employer’s share of Medicare tax on such leave wages) (“Credit”). An employer can also receive a refund, either in the form of an overpayment or an advanced payment, from the IRS to the extent the Credit is in excess of the employer’s social security tax owed for the quarter.
An eligible employer can obtain the Credit in two ways. The employer can either (1) take the Credit from the amount the employer would have otherwise had to pay in Federal Employment Taxes (defined below) during that same quarter, (2) obtain an overpayment or request an advance from the IRS to the extent the amount of Federal Employment Taxes from the same quarter is not enough to cover the Credit. To request the advance, an employer should file IRS Form 7200.
Federal Employment Taxes that are available for retention include federal income taxes withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare taxes with respect to all employees.
4. Employers Need to Document Their Entitlement to the Credits.
In order to substantiate a claim for FFCRA Credits from the IRS, employers are advised by the IRS to maintain the following records for four years:
- Documentation to show how the employer determined the EPSL and EFMLA paid to eligible employees for the Credit, including records of work, telework, and EPSL and EFMLA.
- Documentation to show how the employer determined the amount of qualified health plan expenses allocated to EPSL and EFMLA.
- Copies of any completed Forms 7200 submitted to the IRS.
- Copies of the completed quarterly payroll tax return forms, such as Forms 941, submitted to the IRS or, for employers that use third party payers to meet their employment tax obligations, records of information provided to the third party payer regarding the employer’s entitlement to the Credit claimed for Form 941.
The IRS also advises that employers can substantiate eligibility for the FFCRA Credits if they receive written requests for leave from employees that state:
- The employee’s name;
- The date or dates for which leave is requested;
- The COVID-19 reason the employee is requesting leave and written support for such reason; and
- The employee is unable to work, including telework, for such reason.
In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity issuing the order or the health care professional issuing the advice, and, if the person quarantining is not the employee, that person’s name and relation to the employee.
In the case of a leave request due to a school closing/child care unavailability, the statement should also include the name and age of the child, the name of the school/child care, a representation that no one else suitable will care for the child, and for a child older than fourteen needing care during daylight hours, a statement that special circumstances exist requiring the employee to provide care to that child.
B. How Tax Credits Work Under the CARES Act
1. The CARES Act “Employee Retention Credits” Help Employers Facing COVID-19 Related Economic Hardships.
The CARES Act also offers eligible employers tax credits intended to help them keep employees on their payroll despite experiencing economic hardship related to COVID-19. The CARES Act tax credits are called “Employee Retention Credit.” Employee Retention Credits are available to all employers regardless of size, including independent schools, experiencing a hardship. There are only two exceptions: state and local governments and their instrumentalities and employers who take out small business loans under the CARES Act.
An employer is experiencing a hardship and, is therefore eligible to claim Employee Retention Credits, if:
- The employer’s business is fully or partially suspended by a government order due to COVID-19; or
- The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
2. Employee Retention Credits are Equal to 50% of Qualified Wages Paid to Employees and May be Used to Offset Payroll Taxes, or if the Credits Exceed Payroll Taxes Due, to Obtain an Advanced Payment of Credits from the IRS.
An eligible employer may receive an Employee Retention Credit, which is a fully refundable tax credit equal to 50 percent of qualified wages (including allocable qualified health plan expenses). This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for each employee is $5,000.
Qualified wages are certain wages paid by an eligible employer that vary depending on the average number of full-time employees.
- Employers with less than 100 full-time employees: If the employer had 100 or fewer full-time employees on average in 2019, qualified wages are all wages paid to employees, regardless of whether the employees are working or not, during any period of economic hardship.
- Employers with more than 100 full-time employees: If the employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time they are not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
Full-time employment for the purposes of the Employee Retention Credits tracks the definition of “full-time employee” under section 4980H of the IRC, which is the definition for full-time employee used under the Affordable Care Act’s Employer Mandate (“ACA”). Accordingly, how an employer defines a “full-time employee” for the purposes of Employee Retention Credits needs to track how the employer defines its full-time employees under the ACA (i.e. generally 30 hours of service per week).
Like the FFCRA Credits, the Employer Retention Credits are applied against the employer’s portion of social security taxes and are fully refundable. The credits are fully refundable because the eligible employer may get a refund if the amount of the credit is more than the federal employment taxes the eligible employer owes. That is, if for any calendar quarter, the amount of the Employee Retention Credits exceeds the employer portion of the social security tax on all wages paid to all employees, then the excess is treated as an overpayment and refunded to the employer. Additionally, eligible employers may receive faster relief by retaining the amount of Employer Retention Credit from federal employment taxes, including withheld taxes that would otherwise be required to be deposited with the IRS, or by requesting an advance of the Employer Retention Credit, if the Credit exceeds what the employer is required to deposit. Employers should also use Form 7200 to apply for advances on Employee Retention Credits from the IRS.
There are three things to keep in mind about Employee Retention Credits under the CARES Act. EPSL and EFMLA paid to employees does not count as qualified wages for the purposes of determining the amount of Employee Retention Credits. However, eligible employers may receive both types of tax credits. Finally, an employer may not receive the Employee Retention Credits if the employer also receives a Small Business Interruption Loan under the Paycheck Protection Program authorized under the CARES Act.
C. Guidelines from the IRS on Tax Credits under FFCRA and CARES Act
On March 31, 2020, the IRS released the following:
- COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs – This is a summary of how the FFCRA Credits work, plus a set of frequently asked questions and answers from the IRS about the FFCRA Credits.
- FAQs: Employee Retention Credit under the CARES Act – This is a set of frequently asked questions and answers from the IRS about the Employee Retention Credits under the CARES Act.
- Form 7200, Advanced Payment of Employer Credits Due to COVID-19 – This is the form employers should use to apply for advanced payments of the FFCRA Credits or the Employee Retention Credits under the CARES Act, to the extent they qualify for advances.
- Instructions to Form 7200 – These are the instructions on completing Form 7200.
- Notice 2020-62 – This is an additional notice from the IRS, outlining how the CARES Act Employee Retention Credits work.
- Notice 2020-22 – This notice provides employers relief from the failure to deposit penalty typically imposed by the IRS on an employer’s failure to timely deposit payroll taxes if the amounts not deposited are equal to or less than the credits claimed under FFCRA and the CARES Act.
Finally, the IRS has its own landing page, where it is regularly publishing information about COVID-19 tax matters: https://www.irs.gov/coronavirus.
Further guidance is likely to be posted on that landing page. In the meantime, independent schools are encouraged to consult with their payroll providers and tax-professionals for further guidance on how to take advantage of the FFCRA Credits and the Employee Retention Credits under the CARES Act.