Naya Pearlman, J.D., LL.M, Ken H. Maeng, J.D. and Shayna Byrne, J.D.
3.19.20 | Client Alert – COVID-19 Update
In what is expected to be a series of Federal government measures to help ease the economic impact of the coronavirus (COVID-19) pandemic, the Senate passed and the President signed into law another legislative response to COVID-19.
This new legislation responds to the national emergency declaration by providing for free COVID-19 testing; emergency food aid to eligible children, seniors, and low-income families; emergency funding to states for unemployment benefits and Medicaid, paid sick leave, paid family and medical leave; and business credits as relief for mandatory paid leave.
Here are the key tax elements of The Families First Coronavirus Response Act (Act):
The Act mandates employers with fewer than 500 employees to provide paid sick leave and paid family and medical leave for eligible employees who have worked at least 30 days before the impact of COVID-19. These companies are required to provide up to 10 business days (or 2 weeks) of paid sick leave and up to 10 weeks of protected paid family and medical leave for eligible employees affected by COVID-19. In return for paid leave, employers will be granted tax credits as described below.
Tax Credit for Paid Sick Leave: A refundable payroll tax credit is available to compensate employers for the cost of providing paid COVID-19 related sick leave. For the credit to be available, an employee must be unable to work or telework for any of the following reasons.
- The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19.
- The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
- The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
- The employee is caring for an individual who is subject to an order as described in clause (1) or has been advised as described in clause (2).
- The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable due to COVID-19 precautions.
- The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.
Under the new Act, eligible full-time employees are entitled to paid sick leave time of 80 hours (or 10 full days), while part-time employees are entitled to paid sick leave time equal to the number of hours that such employee works, on average, over a two-week period. Sick leave is mandated to be paid at the employee’s usual pay rate but capped at $511 per day, and $5,110 in the aggregate, for leave qualifying under clauses (1), (2), or (3) above. At this rate cap, paid sick leave would fully compensate an employee earning an annual salary of about $132,860 ($511 dollars per day x 5 days/week x 52 weeks).
In the case of leave qualifying under clauses (4), (5), and (6) above, the amount of sick leave wages taken into account may not exceed $200 per day, and $2,000 in the aggregate. In addition, the total number of days taken into account for the calendar quarter with respect to an individual under all clauses may not exceed the excess of 10 over the aggregate number of days for all preceding calendar quarters.
For paid sick leave, the employer is allowed a credit against the applicable payroll tax (social security and railroad retirement tax) that is imposed on the employer for each calendar quarter in an amount equal to 100% of the sick leave wages paid, subject to the cap limits. With respect to social security taxes, the applicate tax rate is 12.4% of which half or 6.2% is imposed on the employer on covered wages up to $137,700 in 2020. If for any calendar quarter, the amount of the credit for qualifying sick leave wages exceed the applicable payroll tax with respect to the employment of all employees, the excess is treated as a refundable overpayment to the employer.
Tax Credit for Family and Medical Leave Credit: The Family and Medical Leave Act (FMLA) generally provides for 12 weeks of protected unpaid leave for eligible employees. The new Act amends FMLA to provide up to 10 weeks of protected paid leave to eligible employees for a COVID-19 related public health emergency where the employee is unable to work or telework due to a need to care for the son or daughter under 18 years of age either because the school or place of child care has been closed, or because the child care provider of such son or daughter is unavailable due to the public health emergency.
While the first 10 days of FMLA leave is unpaid, if the employee has accrued vacation, personal leave, or medical or sick leave, they may be applied for the first 10 days of unpaid FMLA leave. After 10 days, family and medical leave is to be paid at two-thirds of the usual pay rate but capped at $200 per day, and not to exceed $10,000 in the aggregate with respect to all calendar quarters. Like sick leave, the credit can be applied against the employer’s share of payroll tax but subject to the cap limits above. If the family and medical leave amount exceeds the employer’s share of payroll tax, the excess credit amount is refundable.
Employers can claim these payroll tax credit on a quarterly basis and can also choose to elect out of the tax credit provisions.
Hardship Exemptions: Employers with fewer than 50 workers may be exempt by regulations from the family and medical paid leave if the imposition of the mandate would jeopardize the viability of the business as a going concern. Employers with fewer than 25 workers are exempt from family and medical paid leave if the position held by the employee no longer exists due to economic or operating conditions of the employer that are caused by a public health emergency during the leave period.
Large Private Employers: Large companies with 500 employees or more are not covered in this Act and therefore, the policies of each company would apply.
Tax Credit Available for Self-employed Individuals: Self-employed individuals are allowed an income tax credit in situations in which a credit would be allowed for mandated paid leave if the individuals were an employee of an employer. Such individuals are allowed an income tax credit of up to 10 days of sick leave pay at the lesser of:
A) $511 per day in the case of sick leave time described in clauses (1), (2), or (3) above (or $200 per day in the case of paid sick leave time described in clauses (4), (5), or (6) above), or
B) 100% of the average daily self-employment income of the individual for the taxable year in the case of sick leave time described in clauses (1), (2), or (3) above (or 67% of the average daily self-employment income of the individual for the taxable year in the case of sick leave time described in clauses (4), (5), or (6) above).
The average daily self-employment income is an amount equal to the net earnings from self-employment income of the individual for the taxable year divided by 260. For qualified paid family leave, after the first 10 days, eligible self-employed individuals may take an income tax credit of up to 50 days (10 weeks) of leave pay at the lesser of two amounts:
A) 67% of the average daily self-employment income of the individual for the taxable year or
B) $200. Self-employed individuals must maintain documentation to establish self-employed status to qualify for credits.
Effective Date: These provisions are effective on the date selected by the Secretary of the Treasury which is during the 15-day period from the date of the enactment and ending on December 31, 2020. We expect guidance to be released soon from the Treasury and IRS to further describe the method for claiming credits.
The Act and tax credit provisions are the beginnings of legislative responses to COVID-19. While this Act is directed towards affected individuals and their families, more economic relief is expected to come from Congress to help businesses that have been severely disrupted by the novel virus. We will keep you apprised of future developments and tax relief as they come.
Visit Berdon’s COVID-19 Information Center for more tips to help you, your family and your business navigate through the complexities of the COVID-19 pandemic.
Berdon LLP New York Accountants