On March 18, 2020, Congress passed and President Trump signed into law emergency legislation designed to assist small businesses with workforce retention while providing payroll tax credits to the business. The Families First Coronavirus Response Act (the Act) includes several provisions that impact employers with fewer than 500 employees. Such firms employed 47%, of some 59.9 million people in the United States in 2019, according to data from the U.S. Small Business Administration. Specifics of this legislation and its impact on small businesses are below:
The Act generally requires employers with less than 500 employees to provide a certain amount of paid sick and paid leave to employees affected by COVID-19 and provides affected employers with a corresponding employment tax credit. In addition, the Act temporarily expands Family and Medical Leave Act (FMLA) requirements to offer protected leave related to the Coronavirus. The Act contains three sections of particular interest for employers:
- Emergency Family and Medical Leave Act Expansion
- Emergency Paid Sick Leave
- Tax Credits for Paid Sick Leave and Paid Family and Medical Leave
Which Employers Are Affected?
- Most private-sector employers with under 500 employees.
- Some exemptions for certain healthcare providers and emergency responders as well as small businesses with fewer than 50 employees, if such requirements would jeopardize the viability of the small business.
Tax Treatment of Paid Sick Leave and Paid Family and Medical Leave Payments
- Covered sick and family leave payments under the Act are taxable wages for income and employment tax purposes.
- Wages are exempt from Employer Social Security taxes. Such payments are subject to Medicare taxes, but the tax credit is increased by the amount of employer Medicare taxes (i.e., 1.45%) paid on such wages.
Emergency Family and Medical Leave Expansion Act (Emergency FMLA Act)
- Employees who have been employed for at least 30 calendar days are eligible for up to 12 weeks of job-protected leave.
- Employers with fewer than 25 employees are not required to provide job-protected leave for an employee in specified circumstances.
- Expanded FMLA leave is available only when an employee is unable to work (or telework) due to:
- Need to care for a son or daughter under the age of 18 due to school or childcare closure with respect to COVID-19 declared emergency by federal, state, or local authorities.
Specifics of the Emergency FMLA Act
- The first 10 days of the leave can be unpaid.
- An employee may elect to use accrued vacation or personal, medical, or sick leave for those days, including paid sick leave as provided by the Emergency FMLA Act.
- The remainder of the leave must be paid at two-thirds the employee’s regular rate of pay, subject to a limit of $200 per day and up to a total amount of $10,000.
- Paid leave hours are to be paid at the Regular Rate of Pay in accordance with the Fair Labor Standards Act (FLSA).
- Workers under a multiemployer collective bargaining agreement and whose employers pay into a pension plan would have access to paid leave.
Emergency Paid Sick Leave Act
- Employers with 500 or fewer employees and government entities must offer Emergency Paid Sick Leave under this Act to all employees, regardless of how long they have been employed by the employer.
- Paid sick leave applies to employees who are unable to work (or telework) and who meet any of the following conditions:
- Subject to a quarantine related to COVID-19.
- Advised to self-quarantine related to COVID-19.
- Experiencing symptoms of COVID-19 and seeking a medical diagnosis.
- Caring for an individual who is subject to quarantine.
- Caring for a son or daughter if the school or child-care provider is closed.
- Any other substantially similar condition as specified by HHS.
Specifics of the Emergency Paid Sick Leave Act
- Full-time employees are entitled to take up to 80 hours of paid sick leave.
- Part-time employees are entitled to the “number of hours equal to the number of hours that such employee works, on average, over a 2-week period.”
- The determination of hours to be paid is based on the average hours the employee was scheduled per day over the six-month period ending on the date on which the employee takes such leave.
- If the employee does not have six-months of work history with the employer, hours are based on “the reasonable expectation of the employee at the time of hiring of the average number of hours per day that the employee would normally be scheduled to work.”
- Paid sick leave is calculated as follows:
- Maximum $511 per day (and a total of $5,110) for employees in categories 1-3 above.
- Two-thirds of wages up to $200 per day (and a total of $2,000) for employees in categories 4-6 above.
- Employers may pay amounts over such limits, but the tax credit is limited to those amounts.
- The aggregate number of days available to an individual is limited to 10 for 2020.
- Employers are prohibited from requiring workers to find a replacement to cover their hours during time off and from discharging or discriminating against workers for requesting paid sick leave or filing a complaint against the employer.
- Workers under a multiemployer collective bargaining agreement and whose employers pay into a pension plan would have access to paid emergency leave.
Paid Family Leave and Paid Sick Leave Tax Credits – How It Works
- All non-governmental employers with less than 500 employees are allowed a credit against employer Social Security tax liability equal to 100 percent of the qualified sick leave wages paid by the employer, subject to the limits discussed above.
- The credit is increased by specified health expenses (e.g., employer-paid health plan premiums) but limited to qualified health plan expenses that are excluded from employees’ income as coverage under an accident or health plan.
- The tax credit effectively offsets (reduces) the amount of federal employment taxes that must be deposited with the IRS, usually within a few days of the payroll date.
- Intent of the Act is to provide the funds needed to pay sick and family leave benefits under the Act. However, in some cases, such as complete closure of a business, the Treasury Department and IRS will process claims for advance payments of the tax credit.
- The credit may not:
- Exceed the Social Security tax imposed on the employer, reduced by any credits allowed for the employment of qualified veterans and research expenditures of qualified small businesses.
- No credit is allowed with respect to wages for which a credit is already allowed under Section 45S (i.e., the Paid Family Leave Credit, enacted in 2017).
Effective Dates and Non-Preemption
- April 1, 2020
- Sunset effective December 31, 2020
McKonly & Asbury Analysis
The benefit of payroll tax credits based upon 100% of the wages paid for both the Emergency Family and Medical Leave Expansion Act (Emergency FMLA Act) and Emergency Paid Sick Leave Act will certainly benefit small businesses in regards to payment of the employer piece of social security taxes. The legislation has been written to provide for a 100% credit of wages paid, up to the maximum limits noted above. However, this savings is capped at the social security rate for the employer of 6.2% of the wages paid for both of these Acts. While the tax credit will provide savings to the business, the ability to recapture all of these wages through tax credits will most likely take time and could extend through the remainder of 2020 and possibly into 2021. Each business will need to analyze the cash flow generated from this legislation and both the short-term and long-term benefits of both Acts.
McKonly & Asbury is here to assist small businesses. Further questions on this legislation and the impact on your business can be directed to David Blain, CPA, CVA, Partner & Director of Entrepreneurial Services at McKonly & Asbury at email@example.com or by calling (717) 972-5722.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although McKonly & Asbury has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.