IRS Refundable Tax Credits Can Fund Paid Leave

Accountant working with US tax formsOn March 20th the IRS issued Release IR 2020-57 announcing that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.

The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways

Paid Sick Leave for Workers

For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.

Complete Coverage

Employers receive 100% reimbursement for paid leave pursuant to the Act.

  • Health insurance costs are also included in the credit.
  • Employers face no payroll tax liability.
  • Self-employed individuals receive an equivalent credit.

Fast Funds

Reimbursement will be quick and easy to obtain.

  • An immediate dollar-for-dollar tax offset against payroll taxes will be provided
  • Where a refund is owed, the IRS will send the refund as quickly as possible.

Small Business Protection

Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

Easing Compliance

Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

Overview

An employer with fewer than 500 employees, subject to the new Sick Leave or Family and Medical Leave payments related to COVID-19, would potentially have to make these payments from its business funds while waiting to receive the corresponding refundable payroll tax credit after the filing of its quarterly payroll tax returns. IRS Release IR 2020-57 provides 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;
  • 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 IRS:

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

Under guidance which will be released next week, eligible employers paying Emergency Sick Leave or Emergency Family and Medical Leave under the recently created coronavirus legislation 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.

IRS Release IR 2020-57 contains two examples of this:

  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.

IRS Release IR 2020-57 also discusses 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. The release says that DOL will provide emergency guidance and rulemaking to “clearly articulate this standard.”

There are many unanswered questions related to these issues. We will be monitoring the developments and will provide additional guidance as things progress. If you have any questions, please don’t hesitate to contact your Anglin tax professional.