Payroll Tax Credits for Paid Sick Leave and Child Care Leave Authorized for Eligible Employers with Workers Impacted by the COVID-19 Pandemic

Background

On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (H.R. 6201) (the Act) into law, authorizing certain relief to employees and small and midsize businesses pertaining to the COVID-19 pandemic. Among other things, the Act is intended to help the United States surmount the unprecedented deleterious economic effects of the COVID-19 pandemic by supplying businesses and tax-exempt organizations with less than 500 employees with sufficient funds (in the form of refundable payroll tax credits) to provide their employees with paid leave mandated by the Act that is taken in connection with the pandemic related to employees’ health condition or to provide care for family members. A news release (IR-2020-57) issued jointly by the United States Departments of the Treasury (Treasury) and Labor (Labor) and the Internal Revenue Service (the Service) two days after enactment of the Act provides employers guidance on how to obtain the credit.

Paid Sick Leave and Child Care Leave for Employees^[1]

For employees, the Act provides paid sick leave and expanded family and medical leave for COVID-19-related reasons. More specifically, the Act provides that an employee of an eligible employer can receive two weeks (up to 80 hours, or a prorated amount for part-time employees) of paid sick leave at 100 percent of such employee’s rate of pay (up to $511 per day and $5,110 in the aggregate) where the employee is unable to work (or telework) because the employee is quarantined or subject to an isolation order, advised by a health care provider to self-quarantine, or experiencing COVID-19 symptoms and seeking a medical diagnosis. The Act further provides that an employee who cannot work (or telework) because of a need to care for a quarantined individual, an individual advised to self-quarantine by a health care provider, or a child whose school is closed or whose care provider is unavailable for reasons related to COVID-19 precautions, or other substantially similar conditions specified by the Secretary of Health and Human Services, can receive two weeks (up to 80 hours, or a prorated amount for part-time employees) of paid sick leave at a rate equal to two-thirds of the employee’s regular rate of pay (up to $200 per day and $2,000 in the aggregate).^[2] This sick leave is in addition to any annual sick leave the employer regularly provides to the employee.^[3] The Act authorizes the Secretary of Labor to prescribe necessary regulations to carry out the purposes of the sick leave provision, including to ensure consistency between such provision and the child care leave benefit and payroll tax provisions discussed below.

After an initial ten-day leave period (which may be unpaid),^[4] employees of eligible employers who are unable to work (or telework) because of a need for leave to care for a son or daughter under 18 years of age if such child’s school or place of care has been closed or care provider is unavailable because of COVID-19 precautions are also entitled to up to an additional ten weeks of paid family and medical leave at an amount equal to two-thirds of the employee’s regular rate of pay (not to exceed $200 per day and $10,000 in the aggregate).^[5] The Act provides that an employee must provide the employer with such notice of leave as is practicable.

Special rules apply with respect to the sick leave and expanded family and medical care leave benefits described above in the case of employment under certain multiemployer bargaining agreements. Employers may satisfy their obligations under these provisions by making contributions to a multiemployer fund, plan or program based on the paid leave each of their employees is entitled to as long as the fund, plan or program provides the sick leave and child care leave benefits to the employees. 

Small businesses with less than 50 employees may be eligible for an exemption from the sick leave and child care leave requirements of the Act relating to school closings or child care unavailability where such requirements would jeopardize the viability of the business as a going concern. Labor is tasked with providing emergency guidance and rule-making to clearly articulate the standards for such an exemption.

Payroll Tax Credits for Eligible Employers

For eligible employers, the Act creates refundable tax credits to offset the costs to such employers of the employee benefits described above. Eligible employers are businesses and tax-exempt organizations with less than 500 employees that are required to provide emergency paid sick leave and emergency paid child care leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide to employees between the effective date and Dec. 31, 2020.^[6] The credits are available beginning on a date prescribed by the Treasury (but no later than 15 days after enactment of the Act).

Unless otherwise elected, eligible employers may receive a refundable sick leave credit against the tax imposed by section 3111(a) (the employer portion of Social Security taxes) or 3221(a) (the excise tax relating to the Railroad Retirement Act) of the Internal Revenue Code of 1986, as amended (the Code), for each calendar quarter in an amount equal to 100 percent of the qualified sick leave wages paid by such employer under the Act with respect to that period. The tax credit applies for a period that begins no later than April 2, 2020, and ends Dec. 31, 2020. The total number of days taken into account in each calendar quarter cannot exceed ten and is reduced by the number of days taken in preceding calendar quarters. The amount of such credit may be increased by an amount determined based on costs to maintain health insurance coverage for the eligible employee during the qualified leave period under the Act. While the amount of the sick leave credit for any calendar quarter may not exceed the tax imposed under Code sections 3111(a) and 3221(a) for such quarter on the wages of all employees of the employer (regardless of whether they receive paid leave under the Act), the Act expressly provides that such credit is refundable for amounts exceeding any such tax liability. The gross income of an employer is increased by the amount of the credit in order to offset the employer’s deduction for compensation expense.

In addition to the sick leave credit, unless otherwise elected, eligible employers may receive a refundable child care leave credit for an employee who cannot work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable because of the impact of COVID-19. The Act allows as a credit against the tax imposed by section 3111(a) or 3221(a) of the Code for each calendar quarter an amount equal to 100 percent of the child care leave wages paid under the Act by such employer with respect to such period. As with the sick leave credit, the amount of the child care leave credit may be increased by an amount determined based on costs to maintain health insurance coverage for the eligible employee during the qualified leave period under the Act. While the amount of the child care leave credit for any calendar quarter may not exceed the tax imposed under Code sections 3111(a) and 3221(a) for such quarter with respect to the wages of all employees of the employer, the Act expressly provides that such credit is refundable for amounts exceeding any such tax liability. Gross income of the employer for the taxable year that includes the last day of any calendar quarter with respect to which a child care leave credit is allowed shall be increased by the amount of such credit. 

The Act provides that Treasury will promulgate regulations and issue guidance to carry out the purpose of the sick leave and child care leave credits. Among other things, such guidance will (i) be aimed at preventing the avoidance of the purposes of the credits; (ii) seek to minimize compliance and record-keeping burdens on employers; (iii) provide for waiver of penalties for failure to deposit amounts in anticipation of the allowance of the credits; and (iv) inform employers as to how to recapture the benefit of such credits.

The Act provides that any wages required to be paid pursuant to the sick leave and child care leave benefits described above do not constitute wages for purposes of Code sections 3111(a) or 3221(a). As a result, any such payments are exempt from the employer portion of Social Security tax. The Act further provides that the sick leave and child care leave credits authorized by the Act are increased by the amount of tax imposed by Code section 3111(b) (the employer portion of Medicare tax) on the wages for which such credits are permitted, thereby offsetting the employer’s Medicare tax obligations.

Expedited Relief

On March 20, 2020, Treasury, Labor and the Service jointly issued a news release (IR-2020-57) previewing certain administrative guidance relating to the Act that will be forthcoming within days. Such guidance will enable small and midsize employers to begin taking advantage of the refundable sick leave and child care payroll tax credits virtually immediately. While an employer generally must withhold from employee paychecks federal income taxes and the employee’s share of Social Security and Medicare taxes and deposit those withheld amounts, along with the employer’s share of Social Security and Medicare taxes, with the Service, IR‑2020-57 announces that eligible employers that pay qualifying sick or child care leave will be permitted to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit such amount with the Service. The payroll taxes that will be available for retention by an eligible employer include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees (even though the Act itself provides that the credit is an offset only against the employer’s share of certain payroll taxes, as described above). Importantly, if there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid by the eligible employer, the employer will be able file a request for an accelerated refund from the Service, which is anticipated to be processed within two weeks. Details relating to this expedited process are expected to be announced this week.

Senate Bill Would Allow Employers to Defer Payment of Employer Payroll Taxes

Separate from the credits provided under the Act, a version of the Senate stimulus bill addressing the COVID-19 crisis currently under consideration would enable employers to delay payment of the employer portion of certain payroll taxes otherwise payable in 2020; such taxes would instead be paid in 2021 and 2022. The bill would treat an employer’s share of Social Security taxes required to be deposited from the date of enactment through a period ending on or before Jan. 1, 2021, if 50 percent of such amounts are deposited by Dec. 31, 2021, and the remainder by Dec. 31, 2022. We will closely monitor further legislative developments in this area.

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If you have any questions about the issues addressed in this alert or would like a copy of any of the materials mentioned, please contact either of the authors.

^[1] _{For an earlier alert addressing employee leave benefits provided by the Act, see “New U.S. and New York Paid Sick Leave and Paid Family Leave Requirements in the Age of COVID-19,” available at https://www.kramerlevin.com/en/perspectives-search/new-us-and-new-york-paid-sick-leave-and-paid-family-leave-requirements-in-the-age-of-covid-19.html.}

^[2] _{After the first workday (or portion thereof) that an employee receives paid sick time under the Act, an employer may require the employee to follow reasonable notice procedures in order to continue receiving such paid sick time. The Act directs the Secretary of Labor to issue guidelines to assist employers in calculating the amount of paid sick time under the Act not later than 15 days after the date of the enactment thereof.}

^[3] _{The paid sick time provided under the Act is available for immediate use by an employee regardless of how long the employee has been employed by an employer. An employer may not require an employee to use other paid leave provided by the employer to the employee before the employee uses the paid sick time under the Act. Unused paid sick leave authorized by the Act does not carry over to future years. Moreover, an employer is not required to pay the amount of any unused sick leave to an employee who voluntarily or involuntarily separates from employment.}

^[4] _{If the first ten days are unpaid, an employee may elect to substitute accrued vacation or personal leave or medical/sick leave for such unpaid leave. Although not clear, the Act appears to permit but not require an employee to use emergency paid sick leave as may be available to such employee under the Act during the first ten days of such otherwise unpaid leave.}

^[5] _{The expanded family and medical leave provisions under the Act apply to employees who have been employed for at least 30 calendar days.}

[6] _{Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.}