COVID-19 Tax Credits for Paid Sick Leave
Usually, U.S. business owners and individuals use this time of year to complete their federal and state income tax filings, answer last-minute questions, and investigate tax-saving opportunities to consider for the future. This year is very different due to the spread of Coronavirus (COVID-19) across the country. In fact, the daily routine of many has changed because of the various closures of restaurants and bars, suspension of professional sporting events, closure of public schools, and the cancellation of various conferences and other public events. Given the concerns about the economic impact of the virus and measures to manage the spread, the federal government has taken steps to protect the economy. This includes the recent announcement the Fed has reduced interest rates to 0% and the new Families First Coronavirus Response Act (the Act) passed by the House. The Act addresses many concerns, for business owners, there are several tax incentives available for emergency and paid sick leave. To help clients, prospects, and others, Selden Fox has provided a summary of key points below.
Families First Coronavirus Response Act highlights
Emergency Paid Sick Leave
The Act requires companies with less than 500 employees to provide employees two weeks of paid sick leave time, at regular pay rate, to those seeking a diagnosis, care, or quarantine. In addition, employers will be required to pay 2/3 regular rate for time off due to care for an affected family member, or to care for a child whose school or childcare provider is closed. Full-time employees are entitled to 80 hours of paid time off and part-time employees the number of hours they would typically work in a two-week period. It’s important to note these requirements will terminate on December 31, 2020.
Family Leave Act Changes
The Act also amends the Family and Medical Leave Act of 1993 to expand covered benefits. This means any company with less than 500 employees is required to offer employees with at least 30 days of service the right to take up to 12 weeks of job-protected leave if they experience a qualifying Coronavirus event. This includes time needed to adhere to isolation orders, care for an at-risk family member, or for a child when school or care provider is closed. It’s important to note that after two weeks of paid leave, employees will receive compensation that is no less than 2/3 of their usual pay.
Coronavirus Tax Credits
To help businesses manage the financial impact of the paid leave mandates, the following tax credits are available, including:
- Payroll Credit for Paid Sick Leave – There is a refundable tax credit equal to 100% of qualified sick leave wages paid by the employer for each quarter. The credit can be taken against the employer portion of Social Security taxes due on required wages paid for emergency sick leave. For wages paid to full-time employees that obtain a diagnosis, or are subject to isolation and take sick leave, the credit is limited to $511 per day. For amounts paid to employees caring for sick relatives or caring for a child whose school has been closed, the credit is limited to $200 per day. If the credit exceeds employer liability, then the balance is refundable.
- Self Employed Individual Credit – There is also a 100% refundable tax credit available for qualified sick leave related to the diagnosis, care, and isolation orders of self-employed individuals. For those caring for an affected family member of a child facing cancelled school, the credit is equal to 67% of qualified sick leave. This credit is available against federal income taxes and is refundable. There will be documentation requirements to claim the credit, but the specifics are not yet available.
- Payroll Credit for Required Family Leave – There is a 100% refundable tax credit of qualified family leave wages paid. The credit is designed to be used against the employer’s Social Security portion of payroll taxes. Qualified wages are those required to be paid in accordance with the Family Leave Act changes. The amount of wages considered for each employee is limited to $200 per day and capped at $10,000. If the credit exceeds the employer’s total liability, then it can be refunded.
- Self Employed Credit for Family Leave – There is a refundable tax credit equal to 100% of qualified family leave equivalent for certain self-employed individuals. This includes those who would be entitled to receive payment under the Family Leave Act changes if they worked for someone other than themselves. The amount is capped at the lesser of $200 per day or the average self-employment income for the taxable year per day. Only days taken to manage a Coronavirus diagnosis or to care for a child or family members is permitted. The credit is allowed against income taxes and is fully refundable.