Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On March 31, 2020, the IRS published new guidance clarifying how employers can claim tax credits for giving employees paid leave and maintaining their payrolls during the COVID-19 crisis. The agency explained that employers can start taking these credits immediately by reducing the taxes they deposit with the IRS. It also outlined the documents employers should be keeping to support their requests for credits.
Credits for FFCRA Leave
First, the IRS addressed credits for paid leave under the Families First Coronavirus Response Act (FFCRA). The FFCRA created two new benefits: emergency paid sick leave (EPSL) and emergency family and medical leave (FMLA+). EPSL gives employees 80 hours of paid leave for full-time employees (pro-rated for less than full-time), which they can take for six specified reasons related to the coronavirus. FMLA+ gives employees 12 weeks’ leave, the first two weeks of which may be unpaid, with the remaining weeks paid at two-thirds the employee’s regular rate. An employee may take FMLA+ for only one reason: to care for a son or daughter whose school or daycare has been closed because of COVID-19. The per-day and aggregate pay under both programs is subject to statutory caps. A detailed analysis of FFCRA’s leave requirements can be found here.
The FFCRA pays for these benefits via fully refundable tax credits. In its new guidance, the IRS explains how employers can access those credits now. Employers do not have to pay up front and seek reimbursement later; instead, they can offset the cost of leave by keeping a portion of the quarterly federal employment taxes they would otherwise deposit with the IRS.
For this purpose, the cost of leave includes more than just the employee’s straight wages. It also includes the cost of providing group health insurance and any Medicare taxes attributable to the employee’s wages while on leave. As a result, employers may likewise pay for those costs by retaining an equal amount from their quarterly tax deposits.
Even so, in some cases, the cost of leave may exceed the employer’s entire federal employment tax bill. In such a case, the employer can request an advance refund using IRS form 7200. The IRS’s guidance states that it will start processing these requests in April 2020. But beyond that, it gives no hint about when employers can expect to be paid. It states only that it will process requests according to “applicable IRS procedures.”
Though employers may take FFCRA tax credits now, they still have to support their credits with appropriate documentation. In earlier guidance, the Department of Labor punted on what documentation would be necessary, pointing to the IRS. The IRS’s guidance now offers some clarity on that point.
First, the guidance makes clear that, like a request for normal FMLA, a request for EPSL or FMLA+ starts with the employee.1 The employee’s request should include at least four items: (1) the employee’s name; (2) the dates for which the employee is requesting leave; (3) a statement of the reason for the leave; and (4) a statement that the employee cannot work or telework during the leave period.
More information may be necessary when the employee takes leave for certain reasons. For quarantine-related leave, the employee should include the name of the government entity ordering the quarantine or the name of the healthcare professional recommending the quarantine. And for leave related to school or daycare closures, the employee should list (a) the name and age of the child or children needing care, (b) the name of the school or place of care, (c) a representation that no other person will be caring for the child, and (d) if the child is older than 14, a statement describing special circumstances making it necessary to be absent to care for the child.
Yet even when the employee provides all this information, it is not clear whether the employer can require more. The IRS guidance does not say whether the employer can ask for more information. In its own recent FAQs, the Department of Labor suggested that employers could ask for more when the employee requests FMLA+ leave. But the IRS’s guidance does not endorse that view—at least not explicitly. Doubtless, the two agencies will be ironing out differences in their guidance for months to come.
In any event, beyond the employee’s request, the guidance also advises employers to keep documentation showing how they determine the amount of paid leave to provide. This documentation should include records showing how the employer determined the amount of wages to pay during leave (for example, records showing how the employer calculated the employee’s regular rate). The documentation should also include copies of the employer’s IRS forms 941 and 7200. Employers should keep these documents for at least four years.
Credits for Employee Retention under the CARES Act
Among (many) other things, the CARES Act authorizes new tax credits for employers affected by coronavirus-related shutdowns.
To qualify for the credits, an employer must experience either (a) a full or partial shutdown because of a government order related to COVID-19, or (b) a decline in revenue of 50% or more from the same period last year. Employers meeting these conditions can take a tax credit of up to 50% of wages paid to an employee between March 12, 2020, and the end of the year.
The credit caps out at the first $10,000 in wages paid to an employee (meaning the employer can take a maximum $5,000 credit). Which wages are eligible for a credit depends on the employer’s size. If the employer has 100 or fewer employees, it can take a credit for wages paid to any employee. If it has more than 100, it can take a credit only for wages paid to employees not working because of a coronavirus-related shutdown or substantial decline in revenue.
In its new guidance, the IRS addresses a short-lived controversy over whether large employers can take a credit for wages paid to part-time employees. Some employers wanted to take a partial credit for employees whose schedules had been reduced but who continued to receive full pay. Early guidance left that issue unresolved. The new guidance, however, states that employers may take a credit for wages paid during any “time that [sic] the employee is not providing services.” That language suggests that big employers can take at least a partial credit.
The guidance also explains that employers can claim the CARES Act credit the same way they claim FFCRA credits. Instead of paying now and seeking reimbursement later, they can withhold taxes they would otherwise deposit each quarter with the IRS. And if their credits exceed their tax liability, they can seek an advance refund by filing a form 7200.
The IRS also reiterated that employers may not claim overlapping credits or benefits. While employers may claim a credit for both FFCRA leave and CARES Act wages, they may not claim both credits for the same wages. In other words, wages paid to employees on FFCRA leave are ineligible for a credit under the CARES Act. Similarly, employers cannot claim a CARES Act credit for wages paid by a loan under the new Paycheck Protection Program. That program provides low-interest, forgivable loans to small businesses affected by the COVID-19 crisis.
The IRS and other federal agencies are issuing new guidance related to the coronavirus-relief laws daily, if not hourly. The Littler Workplace Policy Institute (WPI) will continue to provide updates on these developments. Employers looking to navigate this regulatory whirlwind should consult experienced counsel.
1 For a helpful analysis on this point, see Jeff Nowak, IRS Limits the Number of Caretakers for Paid Leave, Outlines the Documentation Required to Take Leave, FMLA Insights (Apr. 1, 2020).