COVID-19 Update #4 - Emergency Family Leave Provisions and Related Tax Credits

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes several tax credits as well as mandated leave requirements.  To assist with application of the provisions, the various provisions are discussed in separate blog posts.  

Required Paid Family Leave for Employees

In addition to the required sick leave employers must offer, the Act also added some emergency provisions to the Family Medical Leave Act of 1993 (FMLA).  The effective date of these provisions is April 1, 2020.

Applicable Employers:  While the FMLA does not generally apply to employers with less than 50 employees, the emergency provisions have changed the applicable definitions of "employer" to address the current circumstances.  The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). 

Required Leave Circumstances:  The leave generally is available when an employee must take off to care for the employee's child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or childcare place or (2) makes a childcare provider unavailable.   Note:  the act specifically indicates an employee's son and/or daughter.  This does not extend to care of others at this time.  Therefore, it would not extend to employees who need to care for their grandchildren.  

Amount of Required Leave:  This amount of paid leave is more extensive than the other required sick leave provisions.  (Generally, the first 10 days of leave can be unpaid.  If qualifying, these leave days may have to be considered under the required sick leave provisions of this legislation.  For more information on the required sick leave, see Update #2.)  After 10 days, then paid leave is required, pegged to the employee's pay rate and pay hours. The paid leave rate must be at least 2/3 of the employees regular pay, but it may be capped at  $200 per day and $10,000 in the aggregate per employee.  

For part-time or irregular work schedules, the amount of paid leave is calculated based on the average number of hours the employee was scheduled to work per day for the last six months prior to the date the leave starts. 

Eligible Employee:  An eligible employee is an employee who has been employed for 30 days.  If an employee was laid off after March 1, 2020 and has been rehired, he/she must have been employed for 30 out of the last 60 days prior to the lay off.  

Taxation of Wages:  The required leave payments are taxable, but the compensation is not subject to the employer's portion of OASDI (Social Security tax of 6.2%)

Corresponding Tax Credits for Paid Family Leave

Tax Credits for Employers

Calculating the Credit:  The credit consists of the amount of:

1. The wages paid for the family leave (see note below) subject to the above discussed limits; and 
2. The amount of the cost of maintaining a health plan that is allocable to the paid leave time.

In addition to the base calculation for the credit, an employer is also eligible for a credit on the employer's portion of the Medicare taxes paid on the family leave wages paid. 

Nuance for churches and ministers:  The definition of wages eligible for the credit is defined by IRC Section 3121(a).  Wages paid to ministers performing ministerial duties and to employees of churches that have elected out of the FICA/Medicare system are not wages for purposes of IRC Section 3121(a).  Therefore, the wages paid to ministers and to employees of "electing" churches are not eligible for the credit.  Unless guidance is issued to the contrary, these individuals will need to look to the provisions for self-employed taxpayers to claim the credits.  See the discussion below on self-employed taxpayers claiming a family leave credit. 

Claiming the Credit:  The tax credit corresponding with the EFMLEA mandate is a credit against the employer's 6.2% portion of the Social Security (OASDI) payroll tax.  In the event the credit is more than an employer's OASDI, then the amount is refundable.  

Note:  While guidance as to how to claim the credit is still forth coming, right now we are anticipating the credit being claimed on an employer's Form 941.  

Family Leave Credit for Self-Employed Taxpayers

The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed in a separate blog post.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  As noted above, this should also apply to ministers and to employees of churches electing out of the FICA/Medicare program.  

Limit on the Credit:  The allowable credit is limited to the lesser of either 67% of the average daily self-employment income for the days attributable to family leave or $200 per day.   Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  

Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Technical guidance from the IRS and the DOL is forthcoming and the above interpretation of the law is subject to change based on newly issued guidance. FAQs from the DOL are available at https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.