Social Security Payroll Tax Credit
NOTE
After March 31 ,2021, the credit for paid sick leave under Section 3131 of the Code is increased by the amount of allocable qualified plan health expenses, certain collectively bargained contributions, and the employer's share of social security tax and Medicare tax imposed on the qualified sick leave wages.
A Social Security payroll tax credit is available to qualifying employers who gave their employees Emergency Leave benefits per the Families First Coronavirus Response Act.
Employers who have provided Emergency Paid Sick Leave benefits and Emergency Child Care Leave benefits will be given refundable tax credits against payroll taxes that will refund them fully for qualified sick leave and family leave wages under the Act. A similar credit is available for self-employed individuals against their self-employment tax.
Procedure for Claiming This Credit (IR 2020-57)
Eligible employers who pay qualifying sick or childcare leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.
The payroll taxes that are available for retention include:
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Withheld federal income taxes
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Employee share of Social Security and Medicare taxes, and
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Employer share of Social Security and Medicare taxes with respect to all employees.
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Note: Qualified leave wages are not subject to OASDI (Social Security Taxes); thus, an employer does not receive credit for the OASDI tax leave wages. (Q&A #10, COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs)
Accelerated Payment
If there are not sufficient payroll taxes to cover the cost of qualified sick and childcare leave paid, employers will be able to file a request for an accelerated payment from the IRS using Form 7200. For details see the instructions for Form 7200. The last day to file Form 7200 to request an advance payment for the:
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Second quarter of 2021 is August 2, 2021
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Third quarter of 2021 is November 1, 2021.
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Fourth quarter of 2021 is January 31, 2022.
“ Example - If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date. Example – If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes the employer could use the entire $8,000 of taxes in order to make qualified payments and file a request for an accelerated credit on Form 7200 for the remaining $2,000. ”
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Employers may FAX a completed Form 7200 to: 855-248-0552.
Penalty
No penalty will be assessed for withholding payroll taxes as reimbursement for making sick leave or child care leave required by FFCRA. (Q&A #17).
Late Leave Payments
If an employer does not initially pay an employee qualified leave wages when the employee is entitled to those wages, the employer can pay those wages at a later date and claim a credit for those wages as long as the qualified leave wages relate to leave taken during the period beginning on April 1, 2020, and ending on December 31, 2020 (Q&A #43) or the period beginning on April 1, 2021 through September 30, 2021 (Q&A #62).
Employee Issues
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FFCRA benefits - FFCRA benefits are taxable to the employee just like any wages. They are NOT treated as tax-free Sec 139 disaster relief payments.,
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Salary Reduction Contributions – FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee’s standpoint as a taxpayer; thus, the same rules that generally apply to an employee’s regular wages will apply to leave wages. Thus, an employee can contribute to a 401(k), retirement plan or any other benefit as normal.,
Self-Employed Individuals
Equivalent childcare leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and the self-employed taxpayer can get advance benefit by reducing their estimated tax payments.
An eligible self-employed individual is defined as an individual who regularly carries on any trade or business and would be entitled to receive qualified sick leave wages or qualified family leave wages under the FFCRA if the individual were an employee of an eligible employer (other than himself or herself) that is subject to the requirements of the FFCRA.
Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”
Sick Pay Equivalent Leave
For an eligible self-employed individual who is unable to work or telework because the individual:
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Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
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Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
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Is experiencing symptoms of COVID-19 and seeking a medical diagnosis, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $511 or 100percent of the “average daily self-employment income” of the individual for the taxable year.
Child Care Leave
For an eligible self-employed individual who is unable to work or telework because the individual:
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Is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19 or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
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Is caring for a child if the child’s school or place of care has been closed, or childcare provider is unavailable due to COVID-19 precautions.
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Is experiencing 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, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $200 or 67 percent of the “average daily self-employment income” of the individual for the taxable year. In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is ten. (Q&A #61). Note: after March 31, 2021 the 10-day limit is reset and the prior sick days are disregarded (ARPA).
Average Daily Self-Employment Income
Is an amount equal to the net earnings from self-employment for the taxable year divided by 260. (Q&A #62) A self-employed taxpayer may elect to use their net earnings from the prior taxable year rather than the current taxable year for purposes of calculating their credits. (ARPA Sec 9643(c)(3))
Family Leave Equivalent Amount
The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50, 60 after January 1, 2021) during the taxable year that the self-employed individual cannot perform services for which that individual would be entitled to paid family leave if the individual were employed by another employer (other than himself or herself)), multiplied by the lesser of two amounts:
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$200, or
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67 percent of the average daily self-employment income of the individual for the taxable year.
Both Self-Employed and an Employee of Another
And receiving sick leave or child care leave from the employer, the individual’s self-employment equivalent amount must be reduced (but not below zero) to the extent that the sum of the qualified sick leave equivalent amount and the qualified sick leave wages received exceeds $5,110 in the case of sick leave as the result of the self-employed individual having COVID-19 issues and $2,000 in the case of caring for someone else having COVID-19 issues.
“ Example – SE Sick Pay: Assume that an eligible self-employed individual’s qualified sick leave equivalent amount is $1,500, but the individual also works for another employer and received qualified sick leave wages of $1,000 to care for the individual’s child while school was closed due to COVID-19. The individual’s qualified sick leave equivalent amount would be reduced by $500 [i.e., ($1,500 + $1,000) - $2,000], resulting in a credit for the qualified sick leave equivalent of $1,000 [i.e., $1,500 - $500]. ”
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“ Example – SE Family Leave: Assume that an eligible self-employed individual’s qualified family leave equivalent amount is $5,000, but the individual also works for another employer and received qualified family leave wages of $9,000 to care for the individual’s child while school was closed due to COVID-19. The individual’s qualified family leave equivalent amount would be reduced by $4,000 [i.e., ($5,000 + $9,000) - $10,000], resulting in a credit for the qualified family leave equivalent of $1,000 [i.e., $5,000 - $4,000]. ”
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Where Is the Self-Employed Credit Claimed?
The refundable credits are claimed on the self-employed person’s individual income tax return for the 2020 or 2021 tax year, as applicable. The only way a self-employed individual could have obtained an advance of the credit was by reducing their estimated tax payments. The IRS Form 7202 is to be used by eligible self-employed individuals to compute their equivalent credits for coronavirus-related sick leave and family leave. The allowed credit is then entered on Form 1040 Sch.3, line 12b for 2020 (line 13b or 13h on 2021 Sch. 3).
Small Business Exemption (Pre-2021)
Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or childcare unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer's business as a going concern. The Department of Labor will provide emergency guidance and rule making to clearly articulate this standard.
Coordination With Other COVID-19 Provisions
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Sick Leave & Child Care Leave – An employee can receive both FFCRA Sick Leave and Child Care Leave as long as they are at different times. (Q&A #59),
“ Example: Anne’s child-care provider is unavailable indefinitely due to the COVID-19 outbreak, leaving Anne unable to work or telework to care for her child. For up to the first 80 hours of any period of leave to care for her child, Anne is entitled to qualified sick leave wages, up to $200 per day and $2,000 in the aggregate. After that, Anne is entitled to qualified family leave wages for up to ten weeks of additional leave she needs, up to $200 per day and $10,000 ($12,000 after March 31, 2021) in the aggregate. ”
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Employee Retention Credit - If an Eligible Employer meets the requirements for the employee retention credit, it may receive both credits, but not for the same wage payments., (Q&A #18),
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Paycheck Protection Program (PPP) – FFCRA leave wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness for a PPP Loan under Sec 1106 of the CARES Act. (Q&A #19)
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Enforcement Period - The Labor Department will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, the Labor Department will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. The Labor Department instead will focus on compliance assistance during the 30-day period.
Record Keeping Requirements
Employers must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for the credits, and retain the Forms 941, Employer's Quarterly Federal Tax Return, and Form 7200, Advance of Employer Credits Due To COVID-19, and any other applicable filings made to the IRS requesting the credit. These records must be retained for at least 4 years after the date the tax becomes due or is paid, whichever comes later.
An employer will substantiate eligibility for the sick leave or family leave credits if the employer receives a written request for such leave from the employee in which the employee provides:
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The employee’s name.
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The date or dates for which leave is requested.
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A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason; and
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A statement that the employee is unable to work, including by means of 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 ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.
In the case of a leave request based on a school closing or childcare provider unavailability, the statement from the employee should include the name and age of the child (or children) to be cared for, the name of the school that has closed or place of care that is unavailable, and a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.
For additional information the IRS has an extensive on-line Q&A for FFCRA.