IRS Tax Credit Guidance – FFCRA Compliance
April 1, 2020 by Lincoln Derr
No Joke – The FFCRA Goes Into Effect Today
The Families First Coronavirus Response Act (“FFCRA”) passed by Congress and signed into law on March 18, 2020 goes into effect today. That means employers must immediately begin complying with the paid sick leave and expanded family medical leave benefits outlined in the new legislation. If you’ve missed prior guidance about how compliance will work, check out these updates:
Families First Coronavirus Response Act: Questions and Answer
Families First Coronavirus Response Act: Employee Paid Leave Rights
Families First Coronavirus Response Act: Employer Paid Leave Requirements
More On That Small Business Exemption
Employers with fewer than 500 employees must comply with the FFCRA unless specifically exempted. That exemption includes healthcare providers and first responders and may also include small businesses with fewer than 50 employees. The DOL compliance guidance clarifies how small businesses can show that paying FFCRA expanded leave benefits would jeopardize the long-term survival of their business. The employer must be able to demonstrate:
- Such leave would cause the small employer’s expenses and financial obligations to exceed available business revenue and cause the small employer to cease operating at a minimal capacity;
- The absence of the employee(s) requesting such leave would pose a substantial risk to the financial health or operational capacity of the small employer because of their specialized skills, knowledge of the business, or responsibilities; or
- The small employer cannot find enough other workers who are able, willing, and qualified, and who will be available at the time and place needed, to perform the labor or services the employee or employees requesting leave provide, and these labor or services are needed for the small employer to operate at a minimal capacity.
Employers may deny paid sick leave or expanded family leave only to those employees whose absence would actually cause the small employer’s expenses and financial obligations to exceed available business revenue, pose a substantial risk, or prevent the small employer from operating at minimum capacity. Employers must document the circumstances they believe justify the denial of an FFCRA leave request and should keep such records for their files.
Getting Credit Where Credit is Due
The IRS has now issued its own FFCRA compliance Q & A that answers the question – “Just how is this tax credit thing going to work?”. Wonder no more.
The FFCRA provides eligible employers with refundable tax credits to cover the cost of leave they’re required to pay under the Emergency Paid Sick Leave Act (“EPSLA”) and the Emergency Family and Medical Leave Expansion Act. (“EFMLEA”). Eligible employers, including certain self-employed individuals, are entitled to a fully refundable tax credit equal to the amount of the required paid sick leave and family leave benefits.
The tax credit also includes the employer’s share of Medicare tax imposed on those wages and the cost of maintaining an employee’s health insurance coverage during the paid sick leave and family leave periods. Additionally, the FFCRA tax credit eliminates the employer portion of social security tax imposed on those wages. It also provides employers who don’t have sufficient funds set aside for federal employment taxes to deposit to the IRS form link to request an advance of the refundable credits.
Document, Document, Document
In order to legally claim these tax credits, employers must keep good records related to each employee’s FFCRA leave. The IRS says proper documentation must be kept for at least 4 years after the dates the tax is due or is paid (whichever comes later) and includes the following:
- A written request for FFCRA leave from the employee that includes the employee’s name; date(s) for which leave is requested; a statement of the COVID-19-related reason for the leave request plus written support for that reason; and a statement by the employee that he or she is unable to work or telework because of the stated reason.
- Documentation showing how the employer determined the amount of paid sick and family leave wages to be paid and how the employer determined the qualifies health plan expenses.
- Copies of forms submitted to the IRS regarding requests for an advance of employer tax credits and quarterly federal tax returns.
The IRS Q & A answers a number of other FFCRA-related questionssuch as:
- Can employers deduct employee-approved contributions to retirement plans or employer-sponsored health plans from FFCRA wages? (They can.)
- Are paid sick and family leave wages taxable to employees? (They are.)
- Are qualified leave wages considered a deductible business expense? (Generally, yes.)
- Is a similar tax credit available to someone who is self-employed? (Generally, yes.)
FFCRA tax credits are available to eligible employers beginning April 1, 2020 through December 31, 2020.
Still have questions about the legal implications your business is facing during the pandemic? Send us an email or give us a call. Lincoln Derr can help guide you through this unprecedented time.