FFCRA payroll tax credits: Here’s how it works
Families First Coronavirus Response Act was created to incentivize employers to retain their employees and bear the costs of emergency paid leave, the FFCRA offers covered employers a refundable payroll tax credit. This tax credit offsets the cost of the paid leaves required under the Act,and could make all the difference for certain businesses concerned that the cost of these paid leaves will run them out of business.
How much is the tax credit?
The tax credit is equal to 100 percent of the amount the employer pays in emergency paid sick leave and emergency paid family and medical leave, including a portion of the costs of providing group health plan coverage that are allocable to such leave payments, up to the FFCRA-established per-employee caps.
What must an employer show to receive the tax credit?
In order to claim the tax credit, employers must be able to demonstrate that the amounts paid to employees for emergency paid sick leave and emergency paid family and medical leave were for qualifying reasons under, and subject to the limits of, the FFCRA. Any leaves provided over and above the requirements of the FFCRA are not eligible for the tax credit, so employers being more generous (whether as an assistance to their employees or due to confusion about the Act’s requirements) are not eligible to recoup those costs.
Please visit the department of labor website or our COVID-19 PR Guide for more information on qualifying reasons for leave.
Additional guidance from the IRS relating to the tax credit is available at: https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs#substantiate_eligibility
How does an employer recover the tax credit?
Tax credits are claimed on the employer’s quarterly Form 941, which is used to report and deposit required tax withholdings. The employer is eligible to offset the eligible credit amount against any federal tax obligation it otherwise has on such Form 941 (that is, federal income tax withheld from employee paychecks and the employer’s and employee’s portion of Social Security and Medicare taxes with respect to all employees, not just those on leave). This eliminates the lag that would otherwise be required if the employer were obligated to pay such wages and applicable withholdings, and then wait for the government to process a credit. If the amount of the credit exceeds the amount the employer is otherwise required to deposit with Form 941, a refund will be issued promptly.
Because the tax credits are against payroll tax liabilities, even employers that are not subject to income tax may obtain government funding of FFCRA-required leave, and the above-referenced expedited procedures will dramatically reduce the cash flow concerns associated with employers being obligated to pay wages currently but having to wait for reimbursement from the government.
Can an employer still claim the tax credit if an employee supplements FFCRA leave with paid time off?
The short answer is no. The FFCRA allows employees to use existing paid vacation, personal, medical, or sick leave already provided to them under their employer’s paid leave policy to supplement their leave under the FFCRA. Some employees may choose to do this if, for example, they would normally receive more under their employer’s paid time off (PTO) policy than they would under emergency paid sick leave or emergency paid family and medical leave. Employers can pay their employees in excess of the FFCRA’s requirements; however, they cannot claim a tax credit for those amounts in excess of the FFCRA’s statutory limits. Employers are not required to allow employees to supplement their paid sick leave or expanded family and medical leave with PTO.
Source:
Sorcic, Hannah, et al. “FFCRA Payroll Tax Credits: Here's How It Works.” Employment Law Watch, 4 Apr. 2020, www.employmentlawwatch.com/2020/03/articles/employment-us/ffcra-payroll-tax-credits-heres-how-it-works/.