Tax Law Alert: Coronavirus Response Act Allows Employer Tax Credit

Legal Alert

03.19.2020

President Trump on Wednesday signed into law the Families First Coronavirus Response Act. The Act contains a coronavirus relief package that includes, among other provisions, an expansion of the Family and Medical Leave Act (FMLA) and paid sick leave benefits due to the coronavirus/COVID-19, as well as refundable tax credits for employers when employees receive such benefits and self-employed individuals. Following is a summary of some of the key tax provisions of the Act. A detailed summary of the FMLA and paid sick leave provisions is available here.

Emergency FMLA Expansion for COVID-19

The Act amends the FMLA to allow an employee who is unable to work (or telework) to take paid leave to care for the employee’s child under age 18 if the child’s elementary school, secondary school, or place of care has been closed due to a “public health emergency” with respect to COVID-19 that is declared by a federal, state, or local authority. The benefits apply to employers with fewer than 500 employees and are capped under the Act at $200 per day and $10,000 in the aggregate.

Emergency Paid Sick Leave for COVID-19

The Act also provides that employers with fewer than 500 employees must immediately make available (i) 80 hours of paid sick leave for each full-time employee and (ii) for each part-time employee, the number of hours equal to the hours the part-time employee works, on average, for a two-week period, for certain qualified reasons related to COVID-19. Paid sick leave must be paid at the employee’s regular rate of pay, but is capped at (i) $511 per day and $5,110 in the aggregate in certain circumstances, and (ii) $200 per day and $2,000 in the aggregate in others.

Tax Credits for Employers

Employers required to provide the benefits described above may have at least some of the cost mitigated through refundable tax credits against the 6.2% Social Security payroll tax imposed on employers. Specifically, employers are entitled to a refundable tax credit equal to 100% of the wages required to be paid each calendar quarter under the FMLA expansion and paid sick leave provisions of the Act.

The Act imposes limits on the amount of the tax credits. For credits taken in connection with paid sick leave benefits, the amount of wages taken into account with respect to any individual is limited to $511 per day for employees taking leave because they are sick or quarantined. The limit is $200 per day for workers taking leave to care for another person or because of Health and Human Services-specified conditions. For credits taken in connection with the expanded FMLA benefits, the available credit is limited to $200 per day, per employee and $10,000 in total for any employee.

The Act authorizes employers to receive additional payroll tax credits for group health plan costs for, and the 1.45% Medicare payroll tax on wages paid to, employees pursuant to the FMLA expansion or paid sick leave provisions of the Act.

Tax Credits for Self-Employed

The Act also provides a tax credit for sick leave for certain self-employed individuals that may be taken against the self-employment tax. An eligible self-employed individual is entitled to a credit equal to the individual’s “qualified sick leave equivalent amount,” which is equal to: (i) the number of days (up to 10) during the taxable year the individual cannot work for any reason that would entitle the individual to benefits under the emergency paid sick leave provisions of the Act if the individual were an employee, and (ii) multiplied by the lesser of:

$511 per day for an individual who is sick or quarantined, or $200 per day for an individual caring for another person or on leave because of a Health and Human Services-specified condition; or
100% of the average daily self-employment income for the year for an individual who is sick or quarantined, or 67% of the average daily self-employment income for an individual who is caring for another person or on leave because of a Health and Human Services-specified condition.

A credit is also available for 100% of an individual’s “qualified family leave equivalent amount,” which is equal to: (i) the number of days (up to 50) during the taxable year that the individual cannot work for reasons that would entitle the individual to the benefits of the FMLA expansion provisions of the Act if the individual were an employee, (ii) multiplied by the lesser of: