Earlier this evening, the IRS offered informal guidance in IR-2020-57 regarding its administration of the payroll tax credits enacted as part of the Families First Coronavirus Response Act (the “Act”) earlier this week.  The Act mandates two forms of paid leave for employees of employers of 500 or fewer employees.  Employers of more than 500 employees are neither subject to the Act’s paid leave requirements or eligible for the payroll tax credits provided under the bill.

Required Leave.  An employee who is unable to work because of coronavirus quarantine or self-quarantine or has coronavirus symptoms and is seeking a medical diagnosis, is eligible for up to 80 hours of paid sick leave.  The required sick leave is capped at $511 per day and $5,110 in the aggregate.  Lower caps apply for certain sick leave uses, including caring for someone else who has been diagnoses with COVID-19 or caring for a child under the age of 18 whose school or place of care has closed or whose child care provider is unavailable due to the coronavirus emergency.

In addition, an employee who is caring for a child under the age of 18 whose school or place of care has closed or whose child care provider is unavailable due to the coronavirus emergency is eligible for up to 10 weeks of paid child care leave (following an initial 10 days of leave) under the Family and Medical Leave Act at a rate of pay no less than 2/3 their regular rate of pay.  The required paid child care leave is capped at $200 per day and $2,000 in the aggregate.  For full details of the leave, see our earlier coverage.

Payroll Tax Credits.  Employers required to provide leave under either provision of the Act may receive refundable credits against the employer share of social security taxes due on other wages.  Employers may claim a refundable sick leave credit for sick leave and a refundable child care leave credit equal to the amount of paid leave the employer was required to provide under the Act.  In addition, employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for an employee during the required leave period and for the employer-share of Medicare tax on the amount of required paid leave.

Social Security Wage Exclusion.  Paid leave required to be paid under the Act is excluded from wages for purposes of the employer-share of social security tax.  Accordingly, an employer will not be required to pay social security tax on the amount of paid leave required to be paid by the Act.  However, the employer is required to withhold and deposit the employee share of FICA taxes (both Medicare and social security taxes) and federal income tax on the paid leave.

Reduced Deposit Requirements.  To prevent employers from being required to front the cost of the paid leave, the IRS news release indicates that guidance will be issued next week permitting employers to reduce their employer payroll tax deposits by an amount equal to the amount of paid leave that was required to be paid under the Act rather than depositing the tax with the IRS.  The release indicates that employers will be able to reduce deposits of withheld federal income taxes, employer FICA taxes, and employer FICA taxes with respect to all employees up to the amount of required paid leave.  More formal guidance will be released next week.

Expedited Reimbursement.  In the event that the allowable credits under the Act exceed the employer’s total deposit liability, the IRS announced that it will implement a new procedure allowing employer’s to request an accelerated payment from the IRS, which the IRS expects to process within two weeks.  Details of the procedure will be released next week.

The IRS release includes the following helpful example:

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.