On Wednesday, March 18, 2020, the Families First Coronavirus Response Act (FFCRA or the Act) became law. See our alert on other provisions of the FFCRA here. While only a small portion of the Act affects taxes, the Act provides federal tax credits for paid sick leave and family leave required by the Act for employers with 500 or fewer employees.

Employer Payroll Tax Credits

The Act provides tax credits to employers that pay “qualified family leave wages” to individuals who are unable to work because of complications related to the coronavirus. Payments are qualified family leave wages if an employee is unable to work because: (1) the employee is subject to a quarantine or isolation order; (2) the employee has been advised by a health care provider to self-quarantine; (3) the employee is experiencing symptoms of the coronavirus and seeking a medical diagnosis; (4) the employee is caring for an individual described in (1) or (2); (5) the employee is caring for the employee’s son or daughter if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable due to coronavirus precautions; or (6) the employee is experiencing any other substantially similar condition as specified by the Department of Health and Human Services. 

The credit is equal to 100% of the qualified family leave wages, limited to

  • $511 per day for paid sick leave for employees to care for themselves (situations 1, 2, and 3, listed above), with a maximum of 10 days (the maximum amount of qualified family leave authorized by the Act) – i.e., a maximum of $5,100 per employee, or
  • $200 per day if the paid sick leave is to care for a family member, subject to a maximum of $10,000 per employee.

Employer contributions to a qualified group health care plan (an employee welfare benefit plan established or maintained by an employer that provides medical care for participants or their dependents) are included when calculating the credit to the extent that such contributions are properly allocable to the qualified family leave wages (under guidance to be developed by Treasury).

Employers may not claim credits for any amounts used to determine such an employer’s credit under Internal Revenue Code Section 45S, which allows employers to claim a similar tax credit for family leave wages if the employer has a written family leave policy in place that meets certain requirements, including providing (i) at least two weeks of paid family and medical leave and (ii) the paid leave is at least 50 percent of the wages normally paid to the employee.

The employer tax credits under the Act can be claimed quarterly and are allowable only against employer payroll taxes (i.e., an employer’s share of Social Security and Medicare taxes). If the amount of the allowable credit exceeds the employer’s payroll tax liability for a quarter, the employer can treat the excess as an overpayment and claim a refund. Credits claimed by an employer pursuant to the Act are includable in an employer’s gross income – e.g., an employer who claims $10,000 of credits has $10,000 of gross income with an offsetting deduction for the payment.

Self-Employed Individual Tax Credits

The Act provides similar credits against tax liabilities of self-employed individuals. The limit on credits for self-employed individuals who care for themselves (scenarios 1, 2, and 3 listed above) is determined by multiplying the number of days (up to a maximum of 10 days) the self-employed person is unable to perform services by the lesser of (i) 67% of the taxpayer’s average daily self-employment income, or (ii) $511.

A similar calculation is made for self-employed individuals who care for others (scenarios 4, 5, and 6, listed above), with days unable to perform services (up to a maximum of 50 days) multiplied by the lesser of (i) 67% of the taxpayer’s average daily self-employment income (i.e., the individual’s net self-employment earnings for the taxable year divided by 260), or (ii) $200.

For self-employed individuals, the credit is applied against federal income tax liability and—like the employer credit—is refundable. If the amount of allowable credits exceeds the taxpayer’s income tax, it is treated as an overpayment of tax and the taxpayer can claim a refund.

Self-employed individuals who also are employees may not receive the benefit of both employer-paid qualifying family leave and the self-employment tax credit. The self-employment tax credit is reduced to the extent that qualifying family leave wages plus the self-employment tax credits exceed (i) $2,000 in the case of individuals who care for family members, or (ii) $5,100 in the case of individuals who are sick themselves (scenarios 1, 2 and 3, listed above). For example, if a person who is both employed and self-employed received $4,000 of qualified family leave wages from an employer to take care of himself or herself, the self-employment tax credit would be capped at $1,100.

Employee Payroll Tax Relief

Finally, the Act also provides that qualified family leave wages will not be “wages” to employees. Therefore, employees who receive such payments will not have payroll taxes (i.e., Social Security and Medicare taxes) withheld from their qualified family leave wages.

Applicable Time Period

The credits and exclusions will be available during the period beginning (i) on a date established by the Secretary of Treasury (but which must be no later than 15 days after the enactment date of the Act) and (ii) ending on December 31, 2020.

Please contact any member of the Ballard Spahr Tax Group with questions about the tax provisions of the Act and any other tax issues related to the coronavirus.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.