Unpacking Emerging Tax Relief Provided by the COVID-19 Response Act

by Prof. Robert Bloink and Prof. William H. Byrnes

By now, the coronavirus pandemic has impacted nearly every American in some way—schools and public places have been closed, the markets are struggling (to say the least) and hospitals have already begun to be overrun by those in need treatment. Small and medium-sized business owners (and their employees) are likely to be among those hit hardest, financially, by the pandemic. The Families First Coronavirus Response Act is one of the first formal actions taken to provide federal relief and is likely to be one in a series of laws designed to help small businesses and families. The initial relief comes in the form of expanded paid time off coupled with tax credits for business owners with fewer than 500 employees—and agencies have already followed up with guidance on how to claim the credits.

Expansion of Paid Time-Off for Employees

The Families First Coronavirus Response Act (the Act) applies to private employers with fewer than 500 employees (and government employers), and makes several key changes to paid time off laws. The new law is effective through December 31, 2020.

The Act (1) provides 80 hours' additional paid sick leave for employees (pro-rated for part-time workers) and (2) expands FMLA protections. The additional paid sick leave is capped at $511 per day (with an overall per-employee cap of $5,110) for employees who cannot go to work or telecommute because they (1) are experiencing COVID-19 symptoms and seeking a diagnosis, or (2) are subject to government-mandated quarantine or a recommendation to self-quarantine.

The additional paid sick leave is capped at 2/3 of the employee's pay rate, subject to a maximum $200 cap per day or $2,000 total if the employee (1) is caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing "substantially similar conditions" specified by the Secretary of Health and Human Services (HHS).

FMLA eligibility is also expanded to apply to all employers (not only those with 50+ employees) and to employees who have worked at least 30 days (rather than 12 months). The employer must provide up to 12 weeks of leave (with the first two unpaid, and the remaining paid at 2/3 of the employee's regular rate, capped at $200 per day or $10,000 total). (The first two weeks are, in practice, also paid because they are covered by the expanded 80-hours of paid sick leave

The Act gives the Secretary of Labor the power to exempt businesses with fewer than 50 employees from the new rules if providing the leave would jeopardize the viability of the business.

Employer Tax Credit

The Act provides a tax credit to help small business owners subject to the paid leave expansion. The tax credit is computed quarterly and allows as a credit (1) the amount of qualified paid sick leave wages paid in weeks 1, and (2) qualified FMLA wages paid (in the remaining 10 weeks) during the quarter. In other words, the full amount of the employee’s wages paid under the expanded paid time off and FMLA rules is allowed as a refundable tax credit for the employer.

The credit is taken against the employer portion of the payroll tax. Amounts in excess of the employer taxes due will be refunded as a credit (in the same manner as though the employer had overpaid Social Security taxes during the quarter). However, initial IRS guidance states that the employer is entitled to withhold payments from the employer and employee portions of the Social Security and Medicare tax that the employer is responsible for withholding and paying over to the IRS, as well as from any federal income tax withholding.

According to available guidance, the employer simply retains the amount of the credit. For example, if the employer pays $10,000 in qualifying wages and is responsible for payroll taxes of $15,000 for the period, the employer simply subtracts the $10,000 from that period’s payroll tax payment. Although further guidance is expected, the IRS has announced that it expects to process requests for accelerated payment of the refundable portion of the tax credit (i.e., any amounts that exceed the relevant payroll tax liability) within two weeks of the employer filing a request.

The Act also provides a tax credit for qualified health plan expenses that are allocable to periods when the paid sick leave or family leave wages are paid. Current guidance released by the IRS and Treasury do not provide information about whether this portion of the credit is subject to a cap. Self-employed taxpayers under similar circumstances also qualify for the credits, which serve to reduce estimated tax payments and can be claimed on their federal income tax returns.

Conclusion

During the initial 30 days after the law becomes effective on April 2, 2020, the DOL has announced that it will focus on helping employers comply with the new rules, rather than by pursuing enforcement actions, as long as an employer is acting in good faith to comply. Additional agency guidance is expected on the details of the new rules in the coming days and weeks.