December 7th, 2020
The Families First Coronavirus Response Act (FFCRA) provides paid sick leave, free COVID testing, expanded food assistance and unemployment benefits, and increased Medicaid funding. It provides eligible employers funds to pay sick and family and medical leave through refundable credits.
What does all of this really mean? Tom walks us through it in a 25-minute video, with slides to accompany his presentation. The PDF of the slides on FFCRA sick leave credits is included below the video for download and reference.
Have you been receiving lots of questions from your clients on this matter?
by Tom O’Saben, EA
Now, I want to take a timeout right here to talk to you about the concern I have and the questions that have come in to our Facebook page, and via email to me, and even my clients asking saying, “Well, I only have 10 employees, does this law apply to me?” The answer, basically, ladies and gentlemen is yes. If in fact a business has less than 50 employees, they can make an argument- I guess to the Department of Labor is where they would make this argument -that to provide these benefits would cause irreparable damage to the business or irreparable harm to the business, that they’re not providing the sick leave benefits under the provisions I’m going to share with you in just a moment. But nonetheless, what your client is inviting, if they tell an affected employee, and we’ll get into what that is in a little bit. If they tell an affected employee, “No, I’m not going to provide the sick leave benefits”… that employee has the right to go not to the IRS, but to the Department of Labor. And when you get right down to this (and I’m going to share an example with you that that we have from our Fall Tax School materials, and also from the webinar we did on new developments) is that the government is helping to pay the sick pay by being able to reduce 941 deposits or remove those wages from being subject to employment taxes. And we’ll see that in a little bit.
So let me go ahead and give you our next slide here, which talks about again, what are eligible employers – businesses and tax exempts would would be included to those of you out there involved in tax exempts – with less than 500 employees are required to provide the paid sick leave and family paid leave. Pay attention to those…I’m going to give you a chart in a little bit that talks about the difference between sick leave and family leave. And again, less than 50 employees may not have to do this i f in fact it would compromise their ability to go on as a going concern. The business could perhaps not survive. But remember that when we get done with this, most of this money is actually coming from the government. I also want to mention to you that employers can include health plan expenses that are paid by the employer to provide group health insurance if that money is excluded from the employee’s income under a health plan. And that in fact, increases the amount of the credit, and we’ll see that a little bit. So what we’re going to see is – here’s a blank slide for you to follow as to what is the amount that might be eligible for credit. It would be the gross wages, plus the health plan expenses, plus the employer share of Medicare. We’ve got that filled in for you here on this next slide. Gross wages plus the health plan expenses, plus the employer matching of Medicare equals the amount of credit that is eligible. Now, I will tell you that when the President signed this on March the 18th, it became effective for payrolls paid April 1 of 2020, through December 31. That’s why I think it’s so important now. Perhaps again, people ignored this provision, because the CARES Act came out. The CARES Act got all the publicity…employers went ahead and got PPP loans in order to pay their employees. And now that money is gone, as I mentioned, when we started this session. So here we are now in the fourth quarter, and the employer says, “Gosh, I’d like to keep my employees paid, I’m having to close my doors. And I’ve got COVID impacted employees, what do I do? How can I stay in business?”
So first of all, let’s talk then about wages. Again, those are the wages from April 1 through the end of this year. So there’s no availability of this credit in the first quarter of 2020. It starts with the second quarter, okay? The full amount of credit, by the way, is going to be included in gross income of the business. So I don’t want you to think that you need to go out and change W-2s, reduce wages, reduce payroll taxes… No, take the amount of credit and include it in your employer’s gross income. This is one of the first questions that’s come out of this FFCRA, so I think that’s important to note. So these two next slides are the ones that I want you to really pay attention to, because we talk about what type of circumstance is available or causes the credits, and then how much.
So let’s look at the very first one here, the paid sick leave credit. Look at the second column: if an employee is unable to work. Why? They’re subject to a quarantine or isolation order, isn’t that important? It doesn’t necessarily say that they’re COVID positive. Maybe a member of their family is, but they’re subject to a quarantine or isolation order. They’ve been advised to self quarantine, they have the symptoms and are seeking medical diagnosis. So this is number one. A lot of questions that have been coming into Tax School will say, how does the employer document this? I would say, how about a note from the doctor? How about something from another party – and by another party I mean, by the medical community – which would say this person should isolate? Then what’s available for credit? What can the employer use? The credit is that the employees regular rate of pay, but no more than $511 per day to a maximum of $5,110. That’s 80 hours, it’s two weeks. Okay. The employer then is also eligible for credits for the qualified health plan expenses. Remember the slide that I showed you where we did the calculation of what’s there? And also the employer share of Medicare expenses related to those wages. So this is step one.
So another question that’s come into Tax School has said… Well, we had employees that were told to quarantine back in April. Okay, so we gave them sick leave then. Now we’re finding that the same employee is sick again. My understanding right now, without any action of Congress before the end of the year, of course, we know that talk could change tomorrow. The idea being is for that employee, if I think we’ve already given them their pay for up to 80 hours, you’re done, you’re done. Okay. Let’s look at the second one where we talk about the paid sick leave credit. They’re caring for someone who is subject to COVID-19 quarantine or isolation order, or for someone who’s advised to self quarantine. So it’s not them, but maybe it’s a member of their family. Or they’re caring for a child – listen to this – whose school or daycare is closed due to COVID-19. Or they’re caring for a child whose childcare is unavailable due to COVID-19. In other words they’ve got to stay home and take care of a family member. Here’s the maximum here…look at this column. Two thirds of the employee’s regular pay not to exceed $200 a day or $2,000 total for up to 80 hours. The employer then is also eligible to add on the qualified health care expenses that they’re paying for the employee. And again, that employer share of the Medicare wages. There is a third piece to the leave credits, and that is paid family leave credit. They’re caring for a child whose school or place of care is closed due to COVID-19. They’re caring for a child whose childcare provider is unavailable due to COVID-19. This is specifically directed towards children who cannot go to school or daycare. Now, we mention- sounds very familiar to the second one we just talked about – it’s two thirds of the employee’s pay, capped at $200…10,000 total. But this can run all the way up to 10 weeks under family leave, and it can be combined with the sick leave credit. So the employer could be entitled to a credit for pay for paying their employee up to 12 weeks; two weeks under sick leave and 10 weeks under family leave. I’m going to show you an example of that from our Fall Tax School materials in just a little bit. The employer then is also eligible for those credits for the health insurance coverage that they pay for, and also the Medicare tax. So the payroll credit for the required paid sick leave, they must provide the paid sick leave if the employee is unable to work for those for those reasons we gave you on that on that summary sheet. And remember, it doesn’t look like under five is exempt…under 50 exempt unless, again demonstrate if someone complains to the Department of Labor, that the employer didn’t provide these benefits, that doing so would have caused irreparable harm to the business. The employees can’t work again because of a required quarantine or expecting COVID symptoms. That’s where we get the 80 hours back on that chart, to a maximum of $5,110. I believe that this is an annual limit, unless we get an act of Congress that either extends or goes ahead and comes out with a new plan, maybe FFCRA 2, we could call it. What about the second part? Remember, again, this is not the employee, but the employee can’t go to work. Why? Because they got to care for somebody else. There they can get two weeks, but that’s two thirds of their regular pay. But that maximum was $2,000. So that’s $200 a day, the one before was up to $511. Now again, if the employee makes less than $511 a day…I just had a meeting with a client just two weeks ago, and their employee was making about 250 a day…that’s the most they can give them for two weeks is $250 a day. They have a COVID-quarantined employee. Okay, so in this one, they’re caring for someone else. So we can see it. How is this going to be reported? So remember, I said that the credit ends up being taxable income to the employer. What we’re going to do on a W-2 – the only place that we’re going to mention it is in box 14. Qualified sick leave wages and qualified family leave wages are reported on the W-2. They need to go at it just as information in box 14; we are not going to have a situation where we’re going to make any kind of adjustment to the W-2 for the employees. Okay. How do we get the money? How do we claim the payroll credit? 941s. We do it by either reducing the 941 taxes that the employer needs to send in or for that matter, the amount of wages subject to the employment taxes and can request an advance payment of the credit. I’ll show you that in a little bit. Kind of interesting.
The employer needs to maintain records and documents. Again, that question has been coming in a lot. How do we document that we have a COVID-impacted employee? Well, a letter from the medical provider, it could be a county health type letter… Document, document, document. Because the IRS, we say on the slide here, can assess, reconcile, or recapture any portion of the payroll credit that was erroneously paid or refunded beyond what they should have gotten. So we have to be careful with these. The credit is calculated on the wages paid for periods of leave, because of need to care for a child. Remember that? That’s the third part. This is the family leave one. And by the way, I think it’s important to say they can’t work or telework. We have an awful lot of employees out there who are working from home. Are they working or are they unable to work? What is the circumstance? And that first 10 days may be unpaid, but the employee may be entitled to receive the sick pay wages. And remember that paid family leave is in addition and we’ll see that in an example in just a little bit.
So let’s take a look at an example. We’re gonna talk about Miranda. Miranda ends up needing to take 14 weeks of leave between May and August of 2020. So that fell between the second and third quarter didn’t it? Because the daughter’s childcare provider is closed due to COVID-19. Let’s look at the circumstances. Miranda herself doesn’t have COVID. Her daughter doesn’t have COVID. But the daycare is not available. What happens? First of all, Miranda can have paid sick leave of $2,000. She makes $400 a day, normally; that’s a regular rate of pay. She can have two thirds – remember our chart. So we say that the $400 regular pay, we get two thirds of that, times 10 days, if you calculated that that would come out to $2,667. But the most we can have is $2,000 under that provision. But Miranda can have another provision. She can have paid family leave of up to $10,000. How does that work? Well, we’ve got her $400 regular pay, two thirds of that for up to 50 days. Now that would come out to $13,333. But that, again, is more than she can have. It’s capped at $10,000. So between those two provisions, we have a circumstance where mom has to stay home with her daughter, because her daughter’s daycare is closed, neither one have COVID, we get a letter or something to keep in the file of the employer from the daycare, which says we had to close or maybe even from the county health department… There can be a total of $12,000 of paid sick and family leave that is going to end up being available to Miranda. And we can take a credit for that on the 941s, which we’ll see. But you know, we could also have the 1.45% of Medicare plus the health care on top of that $12,000. So keep that in mind.
I mentioned that we claim this on the 941 or we can request an advance payment of the credits on Form 7200. That’s a brand new form. And what that would be is the employer has already submitted payroll tax deposits to the federal government (like we’ve instructed them for years, haven’t we). They can request for a refund of the form, and if you look at the Form 7200, you will find that you have a circumstance where it’s faxed into a given number at the IRS. We’ll show you in a little bit; we reconcile that on the 941. The 941 becomes the reconciliation tool for all this. Remember, again, wages between April 1 and December 31. So second, third and fourth quarters of 2020.
So I’ve got an example here, again, that comes out of our materials, that says during this period of time, there was $4,500 of wages that were paid by this business, Charming Prints. Forty-five hundred dollars of family leave wages. Also there was $400 of qualified health plan expenses, remember that addition, and 1.45% the Medicare portion for the employer, is $65. So we have $4,965 of eligible wages or eligible amounts here. So what happens? The first thing we have is the employer portion of social security taxes…$30,000 wages… look, what we do. We take the $4,500 of family wages off. The remainder are going to be subject to the 6.2% employer portion of Social Security, right? $1,581. The employee portion of social security taxes is going to be on the whole 30 so we’re not we’re not saving anything there. That’s $1,860. The total Medicare taxes were $30,000 again… $30,000 of wages, 2.9%. That’s $870. And the federal income tax that has to be withheld needs to be remitted; $3,410. So then the total taxes are $7,721. And then we have a circumstance where we have that $4,965 of family leave wages and credit, the total tax liability drives all the way to $2,756. So there’s a big benefit here for the employer. And what’s more is there’s the other provision out here which says and we talked about this a new developments really not in this in this provision here. The employer could also defer the employer share of Social Security tax. You can’t get that part refunded. But they can ask for a deferral; more than half of it would be due by the end of 2021. The other half due by the end of 2022. So it wouldn’t be this whole payroll tax liability that I just described to you. Rather, it would be the employer share of social security taxes. So there’s a possibility there.
In 941, there’s a worksheet to talk through, what is the credit for the qualified sick and family leave wages, and also the employee retention credit, which I’m not getting into here. But I want you to know that that’s available also. So you can go through the worksheets that are available to determine what goes on to the 941. If we have a circumstance where the 941, the employer got an advance on the form 7200. In other words, got money back, look at line 13f is on the form 941. That’s where it’s shown. Also, we want to mention, if we had qualified health plan expenses, those aren’t normally shown on a 941, they would be shown on line 20 of the 941. So I want you to keep that in mind. And back on these worksheets, I think you want to work through those, and you’ll find that we’ll end up with what we’re describing.
Finally, I want to talk about the fact that this credit is also available for self-employed persons. Why? The COVID reasons again, and I’m listing them for you on the screen here. You can see why – number six is kind of a catch-all… a self-employed individual experiences any substantially similar conditions specified by the Secretary of Health and Human Services. Why? They’re unable to work or telework, because of what we describe. Now we have, again, 10 days maximum. Remember that $511, here it comes back, it’s the lesser of that $511 a day or 100% of the individual’s average daily self-employment income for the tax year. Now, we don’t have guidance as to whether we need to look back, I guess we’d have to look at a period of time before we went under COVID if they’re going to use 2020. I don’t have a clear answer for you as to what we use. Also, if we’re caring for someone else, there we have that 10 days, and the $200 a day maximum, but it’s the lesser of that or two thirds of the average daily self-employment income. How do we claim that credit? 7202 is the form number we use for this, it’s going to be on the 1040. And we do that by reducing the payments of estimated income taxes. So the self-employed person can reduce their estimates. But we would be proactive with that. Also, we could have family leave for self-employed people. Remember how Miranda was caring for her daughter, up to 50 days out of work. It’s either lesser of $200 per day, or 67% of the average daily SE income. So again, the most could be was $10,000. Remember that with the example of Miranda? We claim the credit on the 1040 as we described, and we have the Form 7202 to use with a self-employed person. And then that reduces the estimated income taxes. And we show you a draft of the Form 7202 here.
So listen, here’s the deal, and why I thought it was so important to do now and I know this blog is run a little bit long. But I want you to keep in mind that this one was kind of forgotten about, the Families First Coronavirus Response Act, because again, it was so overshadowed by the CARES Act. That being said, here we are now in the fourth quarter 2020, businesses have gone through their PPP money, they don’t know what else to do. And by the way I wanted to mention – people who had PPP loans can also have sick leave credits. They just can’t have it for the same payroll at the same time. In other words, whatever the PPP money was used for, whatever payroll, we can’t have a sick leave credit for the same payroll. But you could have had PPP money that was used back in August. And now we have sick leave credit that we want to use now here in the fourth quarter. Yes, we can have both. So I want you to keep that in mind as well. This may be a real opportunity for your employers, to help get them through this resurgence or this increase of the COVID-19 pandemic numbers with businesses having to shut down, more quarantining going on. And remember, again, the best advice I can give you is any employer who this may involve, they should provide the benefits unless they’ve got a really good reason that they can demonstrate to the Department of Labor, that they can’t afford to provide these benefits. Because they’re getting credit back for it on their 941s. They’re in fact going to have a refund of those payroll taxes that they submitted. So, keep this in mind. Good advice to use with taxpayers. We’ll do everything we can to stay on top of what’s going on. So for all of us here at Tax School, this is Tom O’Saben coming from my apartment in Champaign, Illinois, saying we’ll say goodbye for just a while.
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