8554 / What refundable tax credit is available to employers who provide paid sick leave and FMLA leave under the Families First Coronavirus Response Act?

Editor’s Note: The FFCRA paid leave credits discussed below expired on December 31, 2020. The rules discussed below applied for the 2020 tax year only.The Families First Coronavirus Response Act (FFCRA) created a tax credit to help small business owners subject to the FFCRA paid leave requirements (see Q ).

The tax credit is computed each quarter, and allows as a credit (1) the amount of qualified paid sick leave wages paid in weeks 1-2, and (2) qualified FMLA wages paid (in the remaining 10 weeks) during the quarter. The credit is taken against the employer portion of the relevant employment taxes. IRS guidance provides that employers are entitled to withhold payment of employment tax deposits to cover the amount of the credit. If the amount of the credit will exceed the amount withheld, the employer can file for an advance payment of the refundable credit (see Q and Q for information).

Amounts that exceed the taxes due will be refunded as a credit (in the same manner as though the employer had overpaid taxes during the quarter). While it initially appeared that only Social Security tax deposits could be withheld, guidance now clarifies that employers may retain deposits for Social Security taxes, Medicare taxes, and federal income tax withholding of the employer portion of the employment tax as an immediate advance against the available tax credit.

The employer is also entitled to the credit with respect to amounts of employer-paid qualified health plan expenses that are allocated to periods when the paid sick leave or family leave wages are paid. See Q for information on the employee retention tax credit allowed under the CARES Act.