Among the various COVID-19 lifelines the federal government is throwing to employers through the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act are two significant tax credits relating to paid leave and employee retention. But employers must keep and provide meticulous records to support their claim to these credits. Failure to do so could cost a company millions of dollars in potential tax savings. Here is what employers need to know and do to ensure they don’t miss out.
Paid Leave Credit Under the FFCRA
Recent IRS guidance outlines the types of information and records an employer must maintain to claim a tax credit for reimbursement of paid leave they provide their employees under the FFCRA. As most employers know by now, the FFCRA created two new employee benefits which took effect on April 1, 2020: emergency paid sick leave (EPSL) and emergency family and medical leave (EFMLA).
EPSL allows full-time employees to take 80 hours of paid leave (pro-rated for part-time employees) for six specified reasons related to the coronavirus. EFMLA gives employees a right to 12 weeks of leave, the first two weeks of which may be unpaid, with the remaining weeks paid at two-thirds of the employee’s regular rate. An employee may take EFMLA 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. You can find a detailed summary of FFCRA’s leave requirements here.
The IRS guidance explains that employers can start taking the tax 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. Specifically, the IRS will require employers to collect the following information from any employees requesting and taking leave:
- Employee name
- Requested leave date(s).
- A written statement supporting the COVID-19 related reason for which the employee is requesting leave.
- A statement that the employee is unable to work (including telework) due to such reason, and either:
- In the case of leave based on a quarantine order or self-quarantine advice of a health care professional, the name of the governmental entity or health care professional, and if the person being quarantined is not the employee, the name of such person and their relation to the employee; or
- In the case of leave based on a school closure or unavailability of a child care provider, the name(s) and age(s) of the child(ren) to be cared for, the name of the school or provider, and a representation that no other person will be providing care for the child(ren) during the period of requested leave. If the employee is required to care for a child older than 14 during daylight hours, the employee must also provide a statement that special circumstances exist requiring the employee to provide care.
Additionally, employers should maintain the following records to substantiate their eligibility for the FFCRA tax credit:
- Documentation showing how the employer determined the amount of wages to be paid to employees eligible for paid leave, including records of the employee’s regular work hours (including telework) and regular wages, both of which are used to compute the amount and pay rate of available leave, and records showing the amount of leave actually taken by the employee.
- Documentation showing how the employer determined the amount of qualified health plan expenses that the employer allocated to wages.
- Copies of any completed Forms 7200, “Advance of Employer Credits Due to COVID-19,” the employer submitted to the IRS.
- Copies of completed Forms 941, “Employer’s Quarterly Federal Tax Return,” that the employer submitted to the IRS, or copies of documentation the employer provided to a third party.
Employers need to keep these records for at least four years after the applicable taxes are due or are paid, whichever comes later.
Credits for Employee Retention under the CARES Act
Enacted on March 27, 2020, the CARES Act provides a tax credit designed to encourage employers to keep employees on their payroll, despite experiencing economic hardship due to COVID-19. The CARES Act also authorizes new tax credits for employers affected by coronavirus-related shutdowns.
To qualify for the credits, an employer must experience either:
- a full or partial shutdown because of a government order related to COVID-19, or
- 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 employees, it can take a credit only for amounts paid to employees not working because of a coronavirus-related shutdown or substantial decline in revenue.
In its new guidance, the IRS explains that employers can claim the CARES Act credit the same way they can claim FFCRA tax credits. Instead of paying now and seeking reimbursement later, they can withhold taxes they would otherwise deposit each quarter with the IRS. If their credits exceed their tax liability, they can request an advance refund by filing a Form 7200.
Interplay With Department of Labor Regulations
This IRS guidance is consistent with regulations the Department of Labor (DOL) separately released on April 1, although the IRS requirements are somewhat more detailed. Under the final DOL regulations, an employer may only require additional documentation from an employee to support the need for leave if the IRS requires that documentation in order for the employer to claim a tax credit. Because the IRS does not require such documentation, an employer may no longer require an employee to provide, for example, a copy of a school closure notice or a note from a health care provider advising the employee to self-quarantine. This differs from the DOL’s initial guidance, so employers that have been requiring employees to provide supporting documentation in addition to that listed above should stop doing so.
In some cases, the cost of leave may exceed the employer’s entire federal employment tax bill. In such circumstances, 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. Beyond that, it does not mention when employers can expect to receive the refund. The IRS states only that it will process claims according to “applicable IRS procedures.”
The IRS also reiterated that employers may not claim overlapping credits or benefits. While employers may request 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 proceeds from a Paycheck Protection Program loan. 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. Kreis Enderle’s COVID-19 Resource Center will continue to provide updates on these developments. Employers looking to navigate this regulatory whirlwind should consult experienced counsel.
For additional information, please visit the COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs.
We Are Available to Help During the Coronavirus Emergency
If you have questions about employment issues resulting from the COVID-19 pandemic, the employment law attorneys at Kreis Enderle are here to counsel you regarding your rights. We are working remotely during the crisis and can conference with you by telephone or video.