Employee leave, employer credit provisions, reporting on W-2
Families First Coronavirus Response Act (FFCRA) signed Mar. 18, 2020 requires coronavirus emergency leave for certain employees and tax credit for employers.
Editor's note: This page will be updated as new information is available. Last updated August 10, 2020.
Employers must reconcile advance payment of credits (Originally published in the August 5, 2020 edition of TAX in the News)
The FFCRA and CARES Act introduced three refundable employer credits which may be advanced to eligible employers via Form 7200, Advance Payment of Employer Credits Due to COVID-19. These are the paid sick leave credit, the paid family leave credit, and the employee retention credit. See Employer Tax Credits for information on the three credits.
The IRS has issued a temporary regulation and a proposed regulation regarding advances of employer credits. Any advance that exceeds the amount of the actual credit the taxpayer is allowed is considered an erroneous refund. The regulations authorize assessment of erroneous refunds paid under the two Acts, meaning that the IRS may recover the excess.
Employers are required to reconcile advance payments of refundable credits and enable the IRS to recapture the tax benefits of the credits if there is an excess. This will be done through the process of employment tax returns. The IRS has or will revise Form 941, Employer’s Quarterly Federal Tax Return, Form 944, Employer’s Annual Federal Tax Return and other employment tax-related returns for this purpose. Note that this concept is similar to advance payments of premium tax credits which individuals must reconcile when they file their income tax returns.
The temporary regulation is effective July 29, 2020. See IRS news release IR-2020-169.
Advance payment delay letters sent (Originally published in the July 22, 2020 edition of TAX in the News)
Employers use Form 7200, Advance Payments of Employer Credits Due to COVID-19, to request advances on the employee retention credit, qualified sick leave credit, and qualified family leave credit. The IRS has started sending letters to employers who have experienced delays in Form 7200 processing.
- Letter 6312 is sent if Form 7200 has missing or incorrect information or the employer has made computational errors. In that case, the request may be rejected, or the advance may be in a different amount.
- Letter 6313 is sent for when verification of the employer’s address is needed. Both letters provide instructions on what actions the requestor can or should take.
See IRS news release IR-2020-158.
Qualified wages must be reported on Form W-2 (Originally published in the July 22, 2020 edition of TAX in the News)
IRS news release and Notice 2020-54 provide guidance to employers on reporting qualified sick and family leave wages paid to employees under the FFCRA on Form W-2.
- Qualified sick and family leave wages should be included in boxes 1, 3, and 5 of Form W-2 in the usual manner.
- In addition, qualified sick leave wages paid to employees who were ill should be reported in box 14 of Form W-2 with the following or similar language: “sick leave wages subject to the $511 per day limit.”
- Likewise, qualified sick leave wages paid to employees who were caring for family members or because of closed school/daycare facilities should be reported in box 14 of Form W-2 and indicate: “sick leave wages subject to the $200 per day limit.”
- Qualified family leave wages should be separately shown in box 14 of Form W-2 and indicate: “emergency family leave wages.”
- Alternatively, employers may provide separate statements to employees detailing the amount and type of leave. Separate statements must be included with paper W-2s or provided in the same manner as electronic W-2s.
Notice 2020-54 includes model language employers may optionally include with employee instructions for Form W-2. The model language provides additional information to recipients explaining what the emergency wages were and why they were paid.
For employees who are also self-employed and intend to claim qualified sick leave equivalent or qualified family leave equivalent credits on their own income tax returns, the instructions explain that they must report their qualified sick leave and qualified family leave wage amounts on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, and include it with their returns. Self-employed equivalent credits must be reduced (but not below zero) by qualified sick leave or qualified family leave wages paid by their employers.
Emergency paid sick leave (Originally published in the April 13, 2020 Edition of TAX in the News)
Congress quickly passed the Families First Coronavirus Response Act (FFCRA) by a wide margin and the President signed the measure into law on March 18, 2020. FFCRA provides mandatory coronavirus emergency sick and family leave for eligible employees affected by COVID-19 and refundable tax credits for employers who are required to pay for the employee leave. Equivalent credits are also available for self-employed taxpayers.
FFCRA is an emergency spending measure that also expands unemployment benefits, modifies or expands food assistance programs including school meal programs, establishes no-cost diagnostic testing, and increases federal funding for Medicaid programs.
The IRS has provided initial guidance on FFCRA in news release IR-2020-57. Additional guidance is expected on how employers will complete payroll tax returns (Form 941) and request accelerated credits.
See the Department of Labor release COVID-19 and the American Workplace.
See IRS Notice 2020-21 for the effective dates to pay qualifying leave payments for the employer credit.
Background on emergency paid sick leave for COVID-19 and corresponding credit
Covered employer defined
A covered employer is a private (non-government) business with fewer than 500 employees who provides paid sick leave to eligible employees who are affected by COVID-19. Federal, state, and local government employers with more than one employee are also covered employers.
An eligible employee is unable to work (or telework) because of COVID-19-connected circumstances:
- The employee is ill and subject to quarantine, or advised to self-quarantine, or seeking a medical diagnosis, or
- The employee is caring for an individual who is ill and subject to quarantine or caring for a son or daughter whose school is closed or whose child-care provider is unavailable.
Coronavirus paid leave limits
Eligible full-time employees may receive up to two weeks (80 hours) of paid sick leave; part-time employees receive leave based on their recent work history.
Leave for employees that are ill, advised to quarantine, or seeking diagnosis is capped at $511 per day ($5,110 in total). Leave for employees in caring for an eligible individual is capped at $200 per day ($2,000 in total).
Required sick leave is exempt from the employer (but not employee) portion of social security and Medicare taxes or RRTA tax.
The Secretary of Health and Human Services may specify other circumstances under which an employee is eligible for paid sick leave. The Department of Labor is authorized to exempt business with fewer than 50 employees from providing child-care related leave if the viability of the business is jeopardized.
Refundable credit for employers paying coronavirus leave
Covered private employers are eligible for a 100% refundable credit intended to make them whole for paying required emergency sick leave to eligible employees. The credit is for the paid sick leave, up to the $5,110 or $2,000 per employee maximum as applicable. In addition, employers who provide health insurance to employees on leave may add the cost of the insurance to the credit.
Generally, employers will receive the credit when they file Form 941, Employer’s Quarterly Federal Tax Return. The Treasury Department and IRS intend to issue guidance to employers who are in need of funds to pay required sick leave before quarterly refundable credit is available. The credit sunsets December 31, 2020.
- Example 1. Ajax Co. is required to make an $8,000 deposit of employment taxes. Ajax pays $5,000 in emergency sick leave to eligible employees. Under the FFCRA, Ajax is required to make only a $3,000 deposit.
- Example 2. Brandt Co. is required to make an $8.000 deposit of employment taxes. Brandt pays $10,000 in emergency sick leave to eligible employees. Under the FFCRA, Brandt may request an accelerated credit for the additional $2,000.
Emergency paid family coronavirus leave related to COVID-19 and corresponding credit
A covered employer is a private (non-government) business with fewer than 500 employees who provides paid family leave to eligible employees who are affected by COVID-19. Federal, state, and local government employers with more than one employee are also covered employers.
An eligible employee is unable to work (or telework) in order to care for a son or daughter whose school is closed, or whose child-care provider is unavailable, because of COVID-19 precautions.
Coronavirus paid leave up to 12 weeks
Eligible full-time employees may receive up to 12 weeks of paid family leave at least two-thirds of regular pay, capped at $200 per day $10,000 in total.
Required family leave is exempt from the employer (but not employee) portion of social security and Medicare taxes.
The Department of Labor is authorized to exempt business with fewer than 50 employees from providing paid family leave on the basis of financial hardship.
Note: The paid family leave provision of FFCRA is due to an expansion of the Family Medical Leave Act (FMLA) which provides job-protected leave for certain family and medical reasons. The 12 weeks of paid family leave is an annual per employee maximum under the Act. More information is available at the Department of Labor’s FMLA site.
Refundable credit for employers
Covered private employers are eligible for a 100% refundable credit intended to make them whole for paying required emergency family leave to eligible employees. The credit is for the paid family leave, up to the $10,000 per employee maximum. In addition, employers who provide health insurance to employees on leave may add the cost of the insurance to the credit.
The credit begins after the eligible employee has received the required 10 days of paid sick leave for which the employer has received credit.
As with the paid sick leave credit, employers will generally receive the family leave credit when they file Form 941, Employer’s Quarterly Federal Tax Return. The Treasury Department and IRS intend to issue guidance to employers who are in need of funds to pay required leave before quarterly refundable credit is available.
Equivalent credits for self-employed taxpayers affected by COVID-19
Self-employed taxpayers, including sole proprietors, contractors, non-corporate farmers, and active partners who pay self-employment taxes are eligible for equivalent credits for COVID-19 connected business disruptions.
Equivalent credits are based on equivalent wage income, which means the taxpayer’s average daily self-employment income. In turn, average daily self-employment income is the taxpayer’s net earnings from self-employment divided by 260 (the number of working days in a year based on a 5-day work week). For example, if the taxpayer’s net earnings from self-employment are $39,000 the equivalent wage is $150 per day ($39,000 ÷ 260).
Credits are claimed when the taxpayer files their 2020 individual income tax return. Although credits will not be available until tax season 2021, taxpayers may adjust quarterly estimates to account for the credits. Reminder: the first tax year 2020 estimated tax payment due April 15 is postponed to July 15, 2020.
Sick leave equivalent credit
The categories are the same as those for the employee leave credit.
- The credit is 100% of up to 10 days of equivalent wages for taxpayers who are ill, quarantined, etc. The maximum credit is $511 per day ($5,110 in total).
- The credit is 67% of up to 10 days of equivalent wages for taxpayers who are caring for family members who are ill, quarantined, etc. or caring for children at home because of closures. The maximum credit is $200 per day ($2,000 maximum).
Family leave equivalent credit
The credit it 100% of equivalent wages for taxpayers who must care for children who are at home due to closures. The maximum credit is $200 per day for up to 50 days ($10,000 total).
Equivalent credits are potentially refundable. If the taxpayer is also an employee, equivalent credits are reduced (potentially to zero) by employer paid sick and family leave. Taxpayers claiming equivalent credits are advised to retain records and documentation establishing that they qualify. Expect further guidance from the IRS.
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