IRS Releases Tax Credit Guidance for Coronavirus Paid Leave

On April 1, 2020, the IRS released questions and answers regarding the tax credits for coronavirus (COVID-19) paid leave. The guidance was designed to assist small and midsize employers in claiming tax credits for emergency paid sick and family leave wage payments to employees.

As background, the Families First Coronavirus Response Act (FFCRA) includes provisions requiring employers with fewer than 500 employees to provide paid leave to employees who are unable to work or telework due to certain COVID-19-related reasons. The provisions are intended to enable employees affected by the pandemic to remain on the employer’s payroll. To offset the financial burden to covered employers, the FFCRA provides for federal tax credits to fund the leave payments.

The credits apply to qualified leave payments made between April 1, 2020, and December 31, 2020. “Per employee” daily and aggregate maximums apply, depending upon the reason for and type of leave.

Specifically, the guidance explains that covered employers are entitled to refundable tax credits for the FFCRA paid leave amounts (termed “qualified leave wages”) in addition to health plan expenses and the employer’s share of Medicare tax allocable to the qualified leave wages. To claim the credit for these amounts, employers are able to retain an equal amount of all federal employment taxes, rather than depositing this sum with the IRS. The federal employment taxes available for retention by employers include federal income taxes withheld from employees, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes with respect to all employees. If the federal employment taxes yet to be deposited are not sufficient to cover the full credit amount to which the employer is entitled, the employer will be able to file a Form 7200 to request an advance payment from the IRS.

Employers claiming the credits must retain records and documentation to support each employee’s leave and the corresponding credit amount. Additionally, the employer should retain copies of the applicable IRS filings, including Form 941, Employer's Quarterly Federal Tax Return, and as applicable, Form 7200, Advance of Employer Credits Due To COVID-19.

Employers may find these questions and answers valuable in determining the amount of the credit for the leave wages and allocable health plan expenses, as well as the process for claiming the credit. The guidance also addresses related special issues, including the taxation and deductibility aspects. These IRS questions and answers are accessible at the below link:

COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs »