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Coronavirus Legislation: Payroll & Self-Employment Tax Credits

Posted by : on : March 17, 2020 | 12:00 pm

PLEASE SEE FGMK'S UPDATE TO THIS POST (CLICK HERE), BASED ON DETAILS OF THE "TECHNICAL CORRECTIONS" MADE AVAILABLE ON MARCH 17, 2020.

 

On Saturday March 14, 2020, the House of Representatives passed H.R. 6201, referred to as the Families First Coronavirus Response Act (the “Act”), on a vote of 363 to 40 (one voting “present”). After an initial hold-up, the House passed technical corrections on Monday and the bill is now with the Senate. If the Senate approves the legislation (which could occur as early as Tuesday), it will go to the President who has signaled support for the legislation and is expected to sign the bill into law. This Tax Alert provides an overview of the legislation, as well as an explanation of the included tax credit provisions. Divisions C, E, and G provide the most critical information for employers.

 

Overview of Legislation

 

At a high-level, the legislation breaks down into the following components:

 

    • Division A provides additional government funding to certain government programs, including additional amounts for the Special Supplemental Nutrition Program for Women, Infants, and Children (“WIC”), and the Commodity Assistance Program for the emergency food assistance program. It also allows the Department of Agriculture to approve state plans to provide emergency food assistance to households with eligible children who would otherwise receive free or reduced-price meals if not for school closings. Additional funding is also provided to cover: COVID-19 diagnostic testing for beneficiaries receiving care through the Defense Health Program, as well as for Indians receiving care through the Indian Health Service or Urban Indian Health Organization; tax services to implement tax credits for paid sick and family medical leave (discussed below); and additional home-delivered and pre-packaged meals to low-income seniors. This part of the legislation also provides funding to reimburse costs of COVID-19 diagnostic testing provided to individuals without health insurance and veterans receiving care through Medical Services or through Medical Community Care.
    • Division B provides certain waivers with regard to government nutrition programs to ensure proper funding of such programs and to facilitate access to the programs, including the lunch program for eligible students affected by school closures. It also waives additional criteria for programs, including physical presence at a WIC client and suspends the work and training program requirements for Supplemental Nutrition Assistance Program (“SNAP”) during the crisis.
    • Division C provides the Emergency Family Medical Leave Act (“EFMLA”) which expands the Family Medical Leave Act (“FMLA”). Specifically, it provides employees of employers with fewer than 500 employees, as well as employees of government employers, who have been on the job for at least 30 days, with the right to take up to 12 weeks of job-protected leave under the FMLA for any of the following reasons:
      • To adhere to a requirement or recommendation to quarantine due to exposure or symptoms of the coronavirus;
      • To care of an at-risk family member who is adhering to such requirement or recommendation; and
      • To care for a child (under 18 years of age) of such employee if the child’s school or place of care has been closed or is unavailable due to the coronavirus.
      For purposes of this provision, a “family member” of an employee means any of the following:
      • A parent;
      • A spouse;
      • A son or daughter who is under 18 years of age;
      • An individual who is a pregnant woman, senior citizen individual with a disability, or has access or functional needs AND is a son or daughter, next of kin (or for whom the employee is a next of kin); or grandparent or grandchild.
    • Division D sets forth the Emergency Unemployment Insurance Stabilization and Access Act of 2020. The primary focus of this portion of the legislation is to provide emergency grants and funding, e.g. interest-free loans, to states for activities related to processing and paying unemployment insurance benefits.
    • Division E provides the Emergency Paid Sick Leave Act (“EPSLA”) which requires employers with fewer than 500 employees and government employers to provide two weeks of paid sick leave to employees as follows.
      • The employee must be compensated at 100 percent of his or her regular rate if the leave is due to any of the following:
        • Employee must self-quarantine due to a coronavirus diagnosis;
        • Employee must obtain a medical diagnosis or care if experiencing coronavirus symptoms; or
        • Employee must comply with a recommendation or order by a public official or health care provider on the basis that physical presence of the employee at the job would jeopardize the health of others because of the employee’s exposure to the coronavirus or the exhibition of symptoms of the coronavirus.
      • The employee must be compensated at 67 percent of his or her regular rate if the leave is due to any of the following:
        • Employee must care for a family member who is self-quarantined because of the coronavirus or is experiencing symptoms or has been quarantined as the presence of such individual (the family member) in the community would jeopardize the health of others in the community because such family member was exposed to the coronavirus or is experiencing symptoms; or
        • Employee must care for a child if the school or place of care has been closed or is unavailable due to the coronavirus.

         

        A full-time employee may receive such compensation for a sick time period of work that equates to 80 hours. If the employee is part-time, then the amount of sick time equates to the number of hours that such employee works, on average, over a two-week period.

         

        The amount of time of paid sick leave provided under this legislation is in addition to any paid leave under an existing employer policy. An employer may not change such policy on or after the date the Act is enacted to avoid application of this requirement.

         

        The paid sick time under this part of the Act is provided regardless of how long the employee has been employed by the employer. The employee may choose to use this paid sick time for the use specified above prior to the use of other paid sick time. If an employer fails to provide paid sick time leave, the employer will be considered to have failed to pay minimum wages in violation of the Fair Labor Standards Act of 1938. However, an employer is not required to compensate an employee for any unused portion of such paid sick time due to a subsequent termination of the employment relationship.

         

        This part of the legislation takes effect not later than 15 days after the enactment of the Act and expires on December 31, 2020.
    • Division F requires private health plans to provide coverage for COVID-19 diagnostic testing at no cost to the consumer. It also requires Medicare Part B to cover beneficiary cost-sharing for provider visits during which COVID-19 diagnostic testing is administered or ordered. Currently, Medicare B covers the COVID-19 diagnostic test with no beneficiary cost-sharing. Additionally, Division F requires Medicaid to provide such coverage at no cost to a beneficiary and provides states with the option to extend the Medicaid eligibility to uninsured for purposes of COVID-19 diagnostic testing.
    • Division G provides tax credits as discussed below.
    • Division H identifies the budgetary effects of the Act.

     

    Payroll Tax Credits

     

    While the Act does not provide a payroll tax holiday for which the President advocated, Division G of the Act provides tax credits against payroll tax for employers’ compensation of paid family leave and paid sick leave as required under Division C and Division E of the Act, respectively. It also provides credits against the self-employment portion of income tax for affected self-employed individuals.

     

    Division G of the Act also clarifies that any wages required to be paid by reason of the Act’s enactment (paid family leave wages and paid sick wages) will NOT be considered “wages” for purposes of the Old-Age, Survivors, and Disability Insurance (“OASDI”) as defined under Internal Revenue Code Section 3111(a). As a result, employers will not have to pay the 6.2 percent share of OASDI excise tax on such wages.

     

    Paid Family Leave Credit

     

    Employee – Payroll Tax Credit

     

    The Act provides an employer a credit against the payroll tax imposed under Section 3111(a) in the amount of 100 percent of the qualified family leave wages paid by the employer during the respective calendar quarter. “Qualified family leave wages” is defined as those wages paid by an employer as required by the EFMLA (see Division C discussion).

     

    As provided in Division C of the Act, such wages must equate to at least two-thirds of the employee’s regular rate of pay. However, the amount of “qualified family leave wages” taken into account for the credit computation is capped at a rate of $200 per day. Further, an overall per employee limit exists in the amount of $10,000 per employee for all calendar quarters.

     

    If the employer’s computed credit exceeds the employer’s total liability under Section 3111(a) for all employees for any calendar quarter, the excess credit is refundable. However, the employer must reduce its income tax deduction for payroll taxes paid by any amount of such credit. In addition, an employer may not claim a credit with respect to such wages that also generate a credit under Section 45S, which was the new FMLA tax credit provided by the Tax Cuts and Jobs Act of 2017.

     

    Example 1

     

     

    Employee A receives compensation of $400 per day. Due to the coronavirus, Employee A must take 30 days of FMLA leave. Employer compensates Employee A at two-thirds of her regular compensation rate (after 100% compensation for the first 14 days), which exceeds the $200 per day cap. Employee A’s first 10 days of leave fall in Q2 of 2020. As a result, Employer receives a $2,000 tax credit for use against Q2 payroll tax (10 days X $200/day). Employee A’s compensation in Q3 will generate another $4,000 of credit for the employer in Q3. As a result, Employee A’s cumulative credit generation does not exceed the $10,000 limit.

     

    Employer has total payroll tax liability of $20,000 for Q2. Due to the leave of Employee A and other employees during Q2, Employer has a credit of $25,000. Employer will receive a $5,000 refund. However, Employer must reduce its deduction on its 2020 income tax return for payroll taxes paid by $25,000 (as well as additional credit received in Q3 or thereafter).

     

    Self-Employment – Income Tax Credit

     

    Similarly, a credit is allowed against income taxes and is refundable for an eligible self-employed individual who would be entitled to receive compensation under the EFMLA if the individual was an employee of an employer (other than himself or herself). The credit equates to 100 percent of the qualified family leave equivalent amount with respect to the individual.

     

    “Qualified family leave equivalent amount” equals the product of the number of days (not to exceed 50) during the taxable year that the individual is unable to perform services due the coronavirus multiplied by the lesser of $200 per day or the average daily self-employment income for the taxpayer for the taxable year. “Average daily self-employment income” means an amount equal to net earnings from self-employment for the taxable year divided by 260.

     

    Notably, a double benefit is denied where a self-employed individual also receives wages from an employer by reason of the EMFLA. Such individual would have to reduce the qualified family leave equivalent amount (but not below zero) by an amount in the same proportion as the number of days for which such compensation is received bears to the number of days claimed as unable to perform services as a self-employed individual.

     

    Example 2

     

    Taxpayer B determines his average daily self-employment income to be $300. He is unable to perform services as a self-employed individual for 30 days during 2020 due to the coronavirus. Due to the $200 per day cap, his credit is limited to $6,000 (30 days X $200/day). Taxpayer B also received $1,000 of compensation from an employer under the EFMLA due to his absence from work for 5 days as a result of the coronavirus. Consequently, Taxpayer B must reduce the potential $6,000 credit by $1,000 or one-sixth as determined by the ratio of days for which received compensation (5) over days unable to perform self-employment services (30). Taxpayer B will claim a $5,000 credit against the self-employment tax portion of his income tax for 2020. If any amount of such credit exceeds his self-employment tax, it is refundable.

     

    Paid Sick Wage Credit

     

    Employee – Payroll Tax Credit

     

    An employer may claim credit against the payroll tax imposed by Section 3111(a) for each calendar quarter in an amount equal to 100 percent of the qualified sick leave wages paid by such employer with respect to such calendar quarter. “Qualified sick leave wages” is defined as wages paid by an employer as required by the EPSLA (see Division E discussion).

     

    The amount of “qualified sick leave wages” with respect to an employee depends on whether the employee takes leave due to the coronavirus impact on the employee’s health or due to the need to care for a family member or child as detailed in Division E. In the case of an affected employee, “qualified sick leave wages” may not exceed $511 per day. If the employee takes leave to care for a family member or child, such amount may not exceed $200 per day.

     

    The credit computation also has an overall limit on the aggregate number of days taken into account with respect to any one employee. Such amount for any calendar quarter may not exceed 10 days over the number of days so taken into account for such employee for all preceding calendar quarters.

     

    In computing the credit, an employer would first reduce employment taxes by any credit received as a tax-exempt taxpayer for hiring a qualified veteran or as a qualified small business for research and development. If the amount of paid sick leave credit for the calendar quarter exceeds the resulting payroll tax liability for such quarter, then the excess credit would be treated as an overpayment and will be refunded to the taxpayer. However, the taxpayer must pick up the amount of such credit in gross income for the taxable year that includes the last day of such calendar quarter for which the credit was claimed. Similar to the paid family leave credit, an employer may not claim a credit for any wages for which a credit is claimed under Section 45S.

     

    Example 3

     

    Employee C takes 7 days of paid sick leave in Q2 of 2020 and requires another 5 days of sick leave in Q3. Employee C takes such leave to care for his daughter whose school was closed (thus $200 per day cap applies). Employer pays Employee C $400 per day during such leave. For Q2, Employer claims a credit of $1,400 (7 days X $200 per day) against payroll tax for wages paid to Employee B during his leave. Employer is also able to claim a $600 credit for Q3 for such employee (10 -7 = 3 X $200 per day). Employer’s credit does not exceed the payroll tax liability in either quarter. However, Employer must include the $2,000 of tax credits that offset payroll tax liability in Q2 and Q3 in its 2020 gross income. As a reminder, Employer receives the $2,000 tax credit despite NOT having to pay the 6.2 percent OASDI excise tax on ANY wages required to be paid under the EFMLA or EPSLA.

     

    Self-Employment – Income Tax Credit

     

    Similarly, a credit is allowed against income taxes and is refundable for an eligible self-employed individual who would be entitled to receive paid leave under the EPSLA if the individual was an employee of an employer (other than himself or herself). The credit equates to 100 percent of the qualified sick leave equivalent amount if the leave results from the individual’s health OR 67% of such amount if the leave results from the need to care for a family member affected by the coronavirus or child whose school or daycare are closed or not available.

     

    “Qualified sick leave equivalent amount” means an amount equal to the number of days (but not more than the “applicable number of days”) an individual is unable to perform services due to the coronavirus multiplied by the lesser of $200 per day ($511 per day if due to individual’s own health) or the average daily self-employment income for the taxable year. “Average daily self-employment income” means an amount equal to net earnings from self-employment of the individual for the tax year divided by 260. The “applicable number of days” sets a limit per individual and means the excess (if any) of 10 days over the number of days taken into account for such credit in all preceding taxable years.

     

    As with the paid family leave credit, a double benefit is denied where a self-employed individual also receives wages from an employer by reason of the EPSLA. Such individual would have to reduce the qualified sick leave equivalent amount (but not below zero) by an amount in the same proportion as the number of days for which such compensation is received bears to the number of days claimed as unable to perform services as a self-employed individual.

     

    Example 4

    Taxpayer D must take 20 days off of work due to experiencing symptoms from the coronavirus. He computes his average daily self-employment income for the 2020 taxable year to be $500. Since the leave resulted from his personal situation, the credit is calculated based on a rate of the lesser of $500 or $511 per day. The applicable number of days is capped at 10. As Taxpayer D did not receive wages from an employer in 2020, he will have a credit of $5,000 to apply against the self-employment portion of his income tax.

     

    Need for Additional Guidance

     

    Division C of the Act, which provides the EFMLA, provides certain regulatory authority to the Secretary of Labor. Such authority includes the allowance for issuance of regulations to exempt small businesses with fewer than 50 employees from the application of new FMLA provisions (Sec. 102(a)(1)(F)) if it would jeopardize the viability of the business.

     

    The Act also puts the onus on Treasury to create regulations regarding the tax incentives. Specifically, Treasury will need to develop rules governing the documentation of the credit. For example, the Act denies a self-employment benefit for the self-employment sick leave credit if the individual fails to maintain such documentation as the Secretary may require.

     

    Treasury will need to provide detail regarding the extent of such documentation requirements. Moreover, the government will have to establish guidance as how to document whether an employee or self-employed individual takes leave for one’s self or to care for another. However, if passed by the Senate and signed into law, the Act does provide employers tax relief for expenses incurred due to employee impact resulting from the coronavirus.

     

    The summary information in this document is being provided for education purposes only. Recipients may not rely  on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.

     

    About FGMK

     

    FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.