Authored by Colin Walsh and Christine Faris

Congress recently enacted three significant payroll tax credits in response to the COVID-19 pandemic. The Families First Coronavirus Response Act (FFCRA) (enacted March 18, 2020) contained two similar but distinct payroll credits: 1) the payroll credit for required paid sick leave (paid sick leave credit); and 2) the payroll credit for required paid family leave (FMLA credit). The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (enacted March 27, 2020) created a third credit, called the employee retention credit. All three credits are designed to help employers retain employees during the COVID-19 crisis.

The following outlines the qualifications and the calculation for each credit. Note that employers cannot “double dip” with respect to these credits. In other words, an employer cannot claim both the paid sick leave credit and the employee retention credit with respect to the same employee for the same wages. Moreover, employers that obtain a Payroll Protection Program loan, also created by the CARES Act, cannot also claim a payroll credit. Employers should consult with professionals to evaluate each option.

THE PAID SICK LEAVE CREDIT

Qualification

  1. Do you have fewer than 500 employees?
    Note: The Secretary of Labor has exempted employers with fewer than 50 employees if the paid sick leave requirement would jeopardize the viability of the business as a going concern.
  2. Are you required to pay an employee’s wages under the Paid Sick Leave Act? The Paid Sick Leave Act requires employers to pay 80 hours of wages to an employee if any one of the following applies:
  • Employee experiences quarantine or self-isolation due to a COVID-19 diagnosis
  • Employee has been advised by a healthcare professional to self-quarantine
  • Employee experiences symptoms of COVID-19 and seeking medical diagnosis
  • Employee is caring for an individual who is under a quarantine or self-isolation order
  • Employee is caring for child because of school closure or unavailability of child care provider due to COVID-19

Calculation considerations

  • Multiply employee’s total sick days (maximum 10) times regular rate of pay
  • Qualified wages include qualified health plan expenses
  • Daily credit is capped at $511 (and two-thirds of regular rate of pay, capped at $200, if sick leave relates to school or child care closures or caring for another)
  • Credit offsets the employer’s share of Social Security taxes (i.e., 6.2% times wages, capped at wage base)
  • Credit is refundable to the extent it exceeds the relevant payroll tax liability
  • Credit is available for wages paid for the period beginning April 1, 2020, through Dec. 31, 2020
  • The employer is eligible for advanced refunding, i.e., holdback of relevant payroll taxes

THE FMLA CREDIT

Qualification

  1. Do you have fewer than 500 employees?
    Note: The Secretary of Labor has exempted employers with fewer than 50 employees if the FMLA requirement would jeopardize the viability of the business as a going concern.
  2. Are you required to pay an employee’s wages under the FFCRA’s amendments to the FMLA? The FMLA now requires employers to provide employees with 12 weeks of leave (10 of which are paid leave) if:
  • An employee has been employed for at least 30 days
  • An employee is unable to work due to school or day care closures as a result of COVID-19

Calculation considerations

  • First 10 days of leave do not require compensation
  • After 10 days, employee receives two-thirds of regular pay, capped at $200 per day (maximum $10,000 per employee)
  • The credit is equal to total family leave paid to the employee
  • Qualified wages include qualified health plan expenses
  • Credit offsets the employer’s share of social security taxes (i.e., 6.2% times wages, capped at wage base)
  • Credit is refundable to the extent it exceeds the relevant payroll tax liability
  • Credit is available for wages paid for the period beginning April 1, 2020 through Dec. 31, 2020
  • The employer is eligible for advanced refunding, i.e., holdback of relevant payroll taxes

THE EMPLOYEE RETENTION CREDIT

Qualification

  1. Are you an “eligible employer"?
    -Must carry on a trade or business in 2020
    -Must have operations fully or partially suspended due to government orders or endure a “significant decline in gross receipts”
    -Significant decline means a 50% decline in gross receipts compared to the same quarter in the prior year
    -Note: The credit is no longer available once gross receipts are greater than 80% of the gross receipts for the same quarter in the prior year
    -Example: Assume taxpayer’s 2020 Q1, Q2, Q3 and Q4 gross receipts are 75%, 45%, 85% and 90% of the corresponding 2019 quarters. The taxpayer is eligible for the credit only for Q2 and Q3.
  2. Do you have qualified wages?
    -If more than 100 full-time employees, qualified wages are paid to an employee who is not providing services because of fully/partially suspended operations or a significant decline in gross receipts
    -If 100 employees or less, there is no requirement that an employee not provide services, i.e., qualified wages include payments in exchange for actual services rendered

Calculation considerations

  • The credit equals 50% of qualified wages
  • Credit must be reduced by any payroll credits claimed under the FFCRA
  • Qualified wages include qualified health plan expenses
  • Qualified wages are capped at $10,000 per employee for the entire year
  • Credit offsets the employer’s share of Social Security taxes (i.e., 6.2% times wages, capped at wage base)
  • Credit is refundable to the extent it exceeds the relevant payroll taxes
  • The employer is eligible for advanced refunding, i.e., holdback of relevant payroll taxes

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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