Payroll Tax Alert: Families First Coronavirus Response Act

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (the Act). This new law, which will take effect on April 1, 2020, includes a number of different provisions, including several important employment provisions providing certain employees protected paid leave benefits (“Mandatory Paid Sick and Childcare Leave”). Click here to see our previous advisory. Although the law requires many employers to offer their employees Mandatory Paid Sick and Childcare Leave, it also provides that private employers can receive payroll tax credits to offset the costs associated with these leave benefits.  Although we are still awaiting IRS guidance to clarify many questions with respect to these payroll tax credits, the following is a summary of the key details we have to date:

Payroll Tax Credit for Paid Leave and Health Insurance Costs: The Act includes a dollar-for-dollar payroll tax credit for the employer in the amount of Mandatory Paid Sick and Childcare Leave paid by the employer under the Act. Employers also receive a dollar-for-dollar payroll tax credit for the employer’s cost of providing “qualified health plan expenses properly allocable to” the Mandatory Paid Sick and Childcare Leave paid;

Employer is Paid Immediately From Available Wage Withholdings: The employer receives the tax credit for the amount of Mandatory Paid Sick and Childcare Leave paid in the form of a reduction in the amount federal income tax, Social Security tax, and Medicare tax withholding that the employer would otherwise deposit with the IRS with respect to all of its employees. For example, if an employer was eligible for a $5,000 tax credit for the amount paid by the employer in Mandatory Paid Sick and Childcare Leave under the Act with respect to 10 employees on leave, and the employer withheld $50,000 collectively from all of its employees’ wages in the form of federal income tax, Social Security Tax, and Medicare Tax for the period, the employer will only have to deposit $45,000 of such withholding with the IRS and would keep the remaining $5,000 of withholding as a tax credit to fully offset the amount of Mandatory Paid Sick and Childcare Leave paid. To the extent that there is not enough income and employment tax withholding available to the employer to cover the credit due, the employer will be able to apply to the IRS for an expedited refund that is expected to be issued in 2 weeks.

Emergency Paid Leave is Exempt from Employer-Share of Social Security Tax: Although any Mandatory Paid Sick and Childcare Leave paid to the employee is considered taxable wages and the employee is subject to federal income tax, Social Security Tax, and Medicare Tax Withholding, the employer does not owe the employer-share of Social Security Tax (6.2%) on the Mandatory Paid Sick and Childcare Leave. In addition, the employer is responsible to pay the employer-share of Medicare tax (1.45%) on such emergency paid leave, but can increase the amount of the payroll tax credit dollar-for-dollar by the amount of Medicare tax paid by the employer.

Drummond Woodsum is closely monitoring developments in this area and will continue to provide timely updates as new information is made available. If you are in need of guidance or you have questions please contact Chris Stevenson.