IRS Identifies What Documentation Can Be Required by Employers for FFCRA Leave, and Much More on Tax Credits
The Families First Coronavirus Response Act mandates that private employers with 500 or fewer employees (with exceptions for certain small employers as well as health care providers and emergency responders) and some public sector employers must provide emergency paid sick leave and emergency Family and Medical Leave Act leave for specific COVID-related reasons. The Act, however, did not address what documentation, if any, an employer could request in order to substantiate the leave and receive the tax credits that will fund the leave. The DOL initially provided guidance in its Families First Coronavirus Response Act: Questions and Answers, but subsequently retracted it, directing employers to the Internal Revenue Service for further guidance. And on the eve of the FFCRA’s effective date of April 1, 2020, the IRS finally provided such guidance.
The FFCRA’s Paid Leave Mandates. As we detailed in our FFCRA E-lert as well as our FAQs, the FFCRA contains two paid leave mandates:
The Emergency Paid Sick Leave (E-PSL) Act provides ten days of paid leave, to a maximum of $511 per day and a total of $5,110, if the employee is unable to work or telework for the following reasons:
- The employee is subject to federal, state, or local quarantine or isolation order
- A health care provider (meaning a licensed doctor of medicine, nurse practitioner, or other health care provider permitted to issue a certification for purposes of the Family and Medical Leave Act) has advised the employee to self-quarantine
- The employee has symptoms of COVID-19 and is seeking diagnosis
E-PSL may be paid at 2/3 the employee’s regular rate, to a maximum of $200 per day and a total of $2,000, to an employee who is unable to work or telework for any of the following reasons:
- The employee is caring for an individual under quarantine
- A child’s school or place of care is closed or the child care provider is unavailable due to COVID-19
- Some other substantially similar condition specified by the Secretary of HHS in consultation with the Secretaries of Labor and Treasury
The Emergency Family and Medical Leave Act (E-FMLA) allows employees to use their 12 weeks of FMLA leave (and grants such leave to certain previously ineligible employees) if they are unable to work or telework because they have a bona fide need to care for a child because of the COVID-19-related closure of the child’s school or child care facility, or the unavailability of a child care provider. After the first 10 days of unpaid FMLA leave (which may be covered by E-PSL or other paid leave, at the employee’s choice), the remainder of E-FMLA leave is paid at 2/3 of the employee’s regular rate, up to a maximum of $200 per day, and $10,000 in total.
The Tax Credit (Just the Basics). These paid leave mandates are fully funded up to the caps set forth above through a tax credit. In its newly-issued COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs, the IRS explains that the credit for the full amount of qualified paid leave wages, plus allocable qualified health plan expenses and the employer’s share of Medicare tax, is allowed against the employment taxes on all wages and compensation paid to all employees. If the amount of the credit exceeds the employer portion of these federal employment taxes, the excess is treated as an overpayment and refunded to the employer.
The IRS explains that employers will be able to retain the amount of qualified paid leave wages (plus health plan expenses and its Medicare contribution) against its federal employment taxes owed (income tax withholding, as well as both the employees’ and employer’s share of social security and Medicare taxes), rather than depositing the taxes with the IRS. If the taxes are not sufficient to cover the qualified paid leave wages, the employer can file a request for an advance payment from the IRS.
Employers must retain records and documentation supporting each employee’s leave, discussed below, to substantiate the claim for credits, in addition to Form 941 (Employer’s Quarterly Federal Tax Return) and (new) Form 7200 (Advance of Employer Credits Due to COVID-19), as well as “any other applicable filings made to the IRS requesting the credit.”
In its FAQs, the IRS details the process by which employers may receive the tax credit. We refer you to these questions, as well as your accountant or tax attorney for further assistance on this process.
Documentation of the Employee’s Leave. Of particular significance, the IRS also details the “records and documentation related to and supporting each employee’s leave” as required to substantiate the claim for credits (and validate the need for leave), as follows:
- The employee’s name;
- The date or dates for which leave is requested;
- A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason; and
- A statement that the employee is unable to work, including by means of telework, for such reason.
If the E-PSL request is based on a quarantine, the IRS requires that the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine. If the quarantined person is not the employee, the employee must also provide that person’s name and relation to the employee.
In the case of a leave request for E-PSL and/or E-FMLA based on a school closing or child care provider unavailability, the statement from the employee should include the following:
- The name and age of the child (or children) to be cared for
- The name of the school that has closed or place of care that is unavailable
- A representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave
- If care is needed during daylight hours for a child older than fourteen, a statement that special circumstances exist requiring the employee to provide care
Notably, the DOL states that employers “are not required to provide leave if materials sufficient to support the applicable tax credit have not been provided.”
The IRS also specifies that employers must retain records of employees’ work, telework, and qualified E-PSL and E-FMLA leave, for purposes of showing how the amount of qualified wages were paid. In addition, employer must also retain documentation showing how it determined the amount of qualified health plan expenses that it allocated to wages.
Next Steps for Employers. Employers should implement policies and forms that capture the information listed above, in order to ensure both that the need for FFCRA leave is valid and that they will be able to support their tax credit claims. Employers may wish to consult with their employment counsel for assistance with the policies and forms. As for the actual process of claiming a tax credit, employers should consult their accountant or tax attorney.
Employee Retention Credit. Separately, the IRS also released FAQs on the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This credit is designed to encourage certain employers to keep employees on their payroll, despite experiencing economic hardship related to COVID-19. Notably, any FFCRA paid leave wages for which employers receive the tax credit described above cannot be counted for the CARES Employee Retention Credit. For further information and assistance with the Employee Retention Credit, employers may consult the FAQs and their accountant or tax attorney.