The Payroll Tax Credit – How Employers Get Reimbursed for Federally Mandated Paid Leave

March 31, 2020

By: Kimberly Klein and David Rabinowitz

Employers with less than 500 employees who provide federally-mandated paid sick and family leave for Coronavirus-related reasons are to be reimbursed, dollar for dollar up to certain limits by the federal government. On March 27, three administrative agencies - the U.S. Treasury Department, Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) (collectively, the “Agencies”) - detailed the government’s plan to reimburse such employers through a payroll tax credit under the Families First Coronavirus Response Act (the “Act” or “FFCRA”). 

Employers’ Obligation to Provide Paid Sick Leave

Beginning April 1, 2020, employers must provide paid leave to an employee who:

  1. is subject to a coronavirus quarantine or isolation order;
  2. has been advised by a health care provider to self-quarantine due to coronavirus concerns;
  3. is experiencing symptoms of coronavirus and is seeking a medical diagnosis;
  4. is caring for an individual described in (1) or (2) above (not just limited to family members);
  5. is caring for a child whose school or place of care is closed, or the child care provider of the child is unavailable, due to coronavirus precautions; or
  6. is experiencing any other substantially similar condition specified by HHS in consultation with the Treasury and Labor Departments.

Employees may take up to 10 days of paid sick leave under the Emergency Paid Sick Leave Act (“PSL”) for each of the above-stated reasons.  In addition, employees may take an additional 10 weeks of paid leave for caring for a child as set forth above (scenario # 5) under the Emergency Family and Medical Leave Expansion Act (“Expanded FMLA”).  The employee is paid different amounts depending on the type of leave taken.  For reasons 1-3 above, an employee can receive up to $511 per day or $5,110 over the two week period.  For reason 4-6, an employee can receive up to $200 per day or $2,000 aggregate.  In addition, for reason 5, employees can receive up to $200 per day or $10,000 in the aggregate for the 10 weeks ($12,000 for 12 weeks) for the Expanded FMLA leave.  The employer is reimbursed through a payroll tax credit.

Employers with 50 or fewer employees may qualify for an exemption from these obligations – see below.

The Payroll Tax Credit – How it Works

Instead of depositing with the IRS 1) the withheld federal income taxes; 2) the employee share of Social Security and Medicare taxes; and 3) the employer share of Social Security and Medicare taxes with respect to all employees, the employer will retain these withholdings when they file quarterly payroll tax returns up to the amount of the tax credit that the employer will claim.  If the employer paid more sick leave than the total withheld, the employer deposits nothing and instead applies for a payment from the government. Such requests are to be processed in two weeks or less.  Further guidance detailing the process is expected this week. 

Examples

As an example, if an employer pays $5,000 in reimbursable sick leave, and would otherwise be required to deposit $8,000 in payroll taxes the employer can retain $5,000 of the $8,000 of payroll taxes and only deposit the remaining $3,000 with the IRS on the next regular deposit date. 

If, however, the employer paid $10,000 in reimbursable sick leave but was only required to deposit $8,000 in payroll taxes with the IRS, the employer could retain the entire $8,000 and file a request with the IRS for an accelerated payment for the remaining $2,000.

Eligible employers are also entitled to an additional tax credit for maintaining health insurance coverage during the leave period. 

Self-employed individuals can take the same offsets against their estimated tax payments.

Small Business Exemption from Paid Sick Leave Obligations

Businesses with fewer than 50 employees may be exempt from the Act’s requirements to provide sick leave or Expanded FMLA leave for childcare reasons (scenario #5 above) where the viability of the business is threatened as a result of the leave.  According to the DOL, a business is exempt if the leave will jeopardize the viability of the small business as a going concern, and if an authorized officer of the business has determined that:

  1. The paid sick or FMLA leave would result in “the small business’s expenses and financial obligations exceeding available business revenues and cause the small business to cease operating at a minimal capacity;” 
  2. Employees taking the paid sick or FMLA leave would result in a “substantial risk to the financial health or operational capabilities of the small business because of their specialized skills, knowledge of the business, or responsibilities;” or 
  3. If employees took the paid sick or FMLA leave, there would be insufficient workers who could perform the jobs of those requesting the leave, “and these labor or services are needed for the small business to operate at a minimal capacity.”

30-Day Grace Period

The DOL issued guidance on March 24, 2020, stating that it will not bring an enforcement action for 30-days against any employer in violation of the Act, as long as the employer acted reasonably and attempted to comply with the Act in good faith.