Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

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Daniel F. Rahill, LL.M, CPA, J.D.
Managing Director
Wintrust Wealth Services
 

On March 18, 2020, President Trump signed the second bipartisan stimulus package, the Families First Coronavirus Response Act. The Act provides for free testing for the novel coronavirus (COVID-19), establishes emergency paid sick leave, and expands family and medical leave. The Act also provides for several payroll tax credits for employers to subsidize the impact on small- and medium-sized businesses that have fewer than 500 employees. Note that while larger employers do not benefit from this Act, a massive, $1.6 trillion economic stimulus package is currently being negotiated between GOP and Democratic leaders.

All employers must comply with the new law by April 2, 2020. Employers with fewer than 500 employees are required to provide two weeks paid leave to employees who need to take time off because of an actual or potential illness related to COVID-19, to care for family members who are home ill or quarantined because of COVID-19 exposure, or to care for children who are home because of school or care-provider closures linked to the pandemic. The Act also requires employers to provide up to 12 weeks leave, with 10 weeks paid, for employees who need to take time off to care for children who are home because of school or daycare closure.

Federal payroll tax credits will help cover the costs to employers. Employers who are required to provide paid time off would need to initially bear the costs of paying their employees, but then would receive the payroll tax credits to reimburse them.

On March 20, 2020, the Treasury Department, IRS, and Department of Labor followed-up with IR 2020-57, providing additional guidance on how employers can apply for the two new refundable payroll tax credits. Details of the emergency sick leave, family medical leave, subsidy payroll tax credit provisions, and Release IR 2020-57, are discussed below.

Emergency sick leave
The Act requires all public and private employers with fewer than 500 employees to provide those employees two weeks of paid sick time—regardless of how long the employee has worked for them, and regardless of whether the employee is full or part-time. Under the Act, “two weeks leave” means 80 hours for full-time employees and the typical number of hours over two weeks for part-time employees. Any paid sick leave under the Act is in addition to any sick leave already offered by the employer.

Paid sick time would be available to any employee absent for:

  • Self-isolation or quarantine because they have the coronavirus disease;
     
  • Obtaining a diagnosis because they are exhibiting symptoms of COVID-19;
     
  • Complying with an order from a health-care provider requiring them to self-quarantine or to stay away from work;
     
  • Caring for a family member who is facing quarantine or self-isolation;
     
  • Caring for children if schools are closed or because a caregiver is unavailable because of the ongoing public health emergency; or
     
  • Any other “substantially similar condition” specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

Generally, employers would pay employees at their regular rate of pay for emergency sick leave, capped at $511 per day ($5,110 in the aggregate) if the leave is taken for an employee’s own illness or quarantine (i.e., for the first three bullets above). Employers would pay employees two-thirds of their regular rate of pay for emergency sick leave, capped at $200 per day ($2,000 in the aggregate) if leave is taken to care for others or due to school closures (i.e., for the last three bullets above).

An employer may not require an employee to use other paid sick time or leave before giving access to the new federally mandated paid sick time. An employer must allow an employee to use the federal paid sick time first, and only after the federal paid sick time is exhausted, require an employee who needs more time off to utilize their company offered sick banks.

The Act also requires the Secretary of Labor to publish a poster for employers to inform employees of their rights under the Act, which is expected to be made available in the next seven days, and which must be posted along with the other federally mandated posters relating to federal labor and employment issues.

The Secretary of Labor has been empowered to issue regulations to exempt health care providers and emergency responders from the definition of “employer”. The Secretary also can exempt small businesses with fewer than 50 employees from the requirement to offer leave for a child when a school is closed when the imposition of that paid sick time would jeopardize the viability of the business as an ongoing concern.

Emergency family leave
In addition to the paid sick time hours, the Act extends and amends the Family and Medical Leave Act to obligate most employers with 500 or fewer employees to provide employees with up to 12 weeks of leave (10 of which are paid family leave).

To be eligible, an employee must have been employed for at least 30 days at the time they begin the paid family leave. Once they have been employed for 30 days, they can take a paid family leave if they are unable to work or telework because of the need to care for children if schools are closed or daycare is unavailable because of a declaration of a public health emergency. This paid leave is NOT available for an employee to recover from a COVID-19 diagnosis, or to self-quarantine.

For the first 10 days of paid family leave, there is no compensation required under this portion of the law (though an employee can take other paid leaves, including paid sick time, to receive compensation). Once those 10 days are exhausted, the employee is compensated at two-thirds of their regular rate for the duration of the leave capped at a payment of $200 per day, or $10,000 in the aggregate.

The Act contains no blanket exemption for employers of less than 50 employees. Rather, the Secretary of Labor is empowered to exempt health care providers, emergency responders, and small businesses with fewer than 50 employees if the leave requirement would jeopardize the business as a going concern. Furthermore, in some cases, an employer with fewer than 25 employees would be exempted from restoring an employee to their pre-leave position if the position no longer exists because of the health emergency. Finally, employers with less than 50 employees would not be subject to potential civil action from an employee for an alleged violation of this portion of the Act (although the Department of Labor still would be able to commence an enforcement action against an employer who had failed to comply).

Payroll-tax credit for emergency sick leave
To help small- and medium-sized businesses cope with the impact of the legislation, the relief bill contains several payroll tax credits for employers. Subject to certain limitations, the Act provides an employer payroll tax credit that equals 100% of the qualified sick leave wages paid by the employer under the portion of the bill known as the Emergency Paid Sick Leave Act (Division E of the Act).

The credit is effective for sick leave wages paid starting on a date within 15 days of enactment (to be designated by Treasury) and through December 31, 2020. The credit is generally available for up to $511 in wages (for workers who are quarantined or self-quarantined or who have COVID-19) and wages of up to $200 for other workers for each day an employee receives qualified sick leave pay. The credit would be available for up to 10 days per calendar quarter.

To prevent double benefits, employers’ gross income will be increased by the amount of the credit (meaning the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified sick leave wages, or deduction for health plan expenses), and no credit will be allowed for wages for which a Sec. 45S family and medical leave credit is claimed. The credit would not apply to the federal government, the government of any state, or any subdivision of a state, or any agencies or instrumentalities of these entities. Employers also could elect not to apply the new provision for any calendar quarter.

The credit can be increased by certain qualified health plan expenses of the employer that can be allocated to qualified sick leave wages. Until a mechanism to track these expenses is in place, employers should maintain detailed records supporting their allocations.

Self-employed individuals: The bill also provides eligible self-employed taxpayers with a refundable credit against income tax for qualified sick leave equivalent amounts. An eligible self-employed individual is an individual who regularly carries on any trade or business (as defined in Sec. 1402) and would be entitled to receive paid leave under the Emergency Paid Sick Leave Act if the individual were an employee.

Payroll-tax credit for emergency family leave
Subject to certain limitations, the Act provides an employer payroll tax credit equal to 100% of the qualified family leave wages paid by the employer under the portion of the Act known as the Emergency Family and Medical Leave Expansion Act (Division C).

The credit is available for eligible wages paid during a period that begins on a date starting on a date within 15 days of enactment (to be designated by Treasury) and through December 31, 2020. The credit would apply against the employer portion of Sec. 3111 (a) old age, survivors, and disability insurance (OASDI) taxes or Sec. 3221 (a) Tier 1 Railroad Retirement Act excise taxes. The credit is generally available for up to $200 in wages for each day an employee receives qualified family leave wages. A maximum of $10,000 in wages per employee would be eligible for the credit.

To prevent double benefits, the employer’s gross income will be increased by the amount of the credit (meaning the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified family leave wages, or deduction for health plan expenses), and no credit will be allowed for wages for which a Sec. 45S family and medical leave credit is claimed.

The credit would not apply to the U.S. government, the government of any state or any subdivision of a state, or any agencies or instrumentalities of the foregoing. Employers can elect not to apply the new provision for any calendar quarter.

Self-employed individuals: Eligible self-employed individuals would be eligible for a refundable credit against income tax for qualified family leave equivalent amounts. An eligible self-employed individual is an individual who regularly carries on any trade or business (as defined in Sec. 1402) and would be entitled to receive paid leave under the Emergency Family and Medical Leave Expansion Act if the individual were an employee.

Synopsis of Release IR 2020-57
In payroll-tax guidance IR 2020-57 issued on March 20, 2020, an employer with fewer than 500 employees will need to make emergency sick and family leave payments while waiting to receive the matching refundable payroll tax credit after filing its payroll tax returns. IR 2020-57 clarifies that:

  • Where a refund is owed, IRS will send the refund as quickly as possible;
     
  • There will be a 30-day non-enforcement period for “good faith” compliance efforts; and
     
  • Businesses can retain and access funds which would otherwise be paid to the IRS in payroll taxes and obtain an expedited advance from IRS by submitting a streamlined claim form that will be released next week. The expectation is that these claims will be processed within two weeks or less.

Employers are generally required to pay to the IRS:

  • Withheld employee federal income tax and Social Security and Medicare taxes; and
     
  • Employer share of Social Security and Medicare taxes.

Under future guidance to be released, eligible employers making emergency sick leave or family medical leave payments will be able to retain an amount of these taxes equal to the payments made eligible for credit. The retained amounts can be from the employer’s share of payroll taxes and the employee’s share of federal income, Social Security, and Medicare withholding taxes.

The release contains two examples:

  1. If an eligible employer pays $5,000 in covered sick leave to certain employees and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all employees, deposits can be reduced to $3,000 on its next regular deposit date.
     
  2. If the eligible employer pays $10,000 in covered sick leave, it can reduce the deposit to zero and make a claim under the expedited procedure for $2,000.

Release IR 2020-57 also covers the Small Business Exemption from the Emergency and Family Leave payments. While employers with fewer than 500 employees are covered, the law provides that those with fewer than 50 employees are eligible for an exemption when it would jeopardize the ability of the business to survive as a going concern.