The Families First Coronavirus Response Act provides small and midsize employers (fewer than 500 employees) refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave to their employees for leave related to COVID-19 between April 1, 2020, and December 31, 2020.

The FFCRA requires employers to provide paid leave through two separate provisions: (i) the Emergency Paid Sick Leave Act, which entitles workers to up to 80 hours of paid sick time when they are unable to work for certain reasons related to COVID-19, and (ii) the Emergency Family and Medical Leave Expansion Act, which entitles workers to certain paid family and medical leave.

The FFCRA provides that employers subject to the EPSLA and the Expanded FMLA paid leave requirements are entitled to fully refundable tax credits to cover the cost of the leave required to be paid for these periods of time during which employees are unable to work (which for purposes of these rules, includes telework). 

Certain self-employed persons in similar circumstances are entitled to similar credits.

Paid Sick Leave Credit

The EPSLA requires employers to provide employees with paid sick leave if the employee is unable to work (including telework) due to any of the following:

  1. The employee is under a Federal, state, or local quarantine or isolation order related to COVID-19
  2. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19
  3. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis
  4. The employee is caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
  5. The employee is caring for the child of such employee if the school or place of care of the child has been closed, or the child care provider of such child is unavailable, due to COVID–19 precautions
  6. The employee is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services.

An employee who is unable to work for reasons due to a COVID-19 circumstance described in (1), (2) or (3) above is entitled to paid sick leave for up to two weeks (up to 80 hours) at their regular rate of pay, or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $511 per day and $5,110 in the aggregate.

An employee who is unable to work due to a COVID-19 circumstance described in (4), (5) or (6) above is entitled to paid sick leave for up to two weeks (up to 80 hours) at two-thirds thier regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $2,000 in the aggregate.

The employer is entitled to a fully refundable tax credit equal to the required paid sick leave.

This tax credit also includes the employer's share of Medicare tax imposed on those wages and its allowable cost of maintaining health insurance coverage for the employee during the sick leave period (qualified health plan expenses).

The employer is not subject to the employer portion of social security tax imposed on those wages.

Expanded FMLA Credit

In addition to the paid sick leave credit, under the expanded FMLA, an employee who is unable to work (including telework) because of a need to care for a child whose school or place of care is closed or whose child care provider is unavailable due to COVID-19, as described in (5) above, is entitled to paid family and medical leave equal to two-thirds of the employee’s regular pay, up to $200 per day and $10,000 in the aggregate. 

Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

Employers are entitled to a fully refundable tax credit equal to the required paid family and medical leave (qualified family leave wages).

This tax credit also includes the employer's share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the family leave period (qualified health plan expenses).

Employers are not subject to the employer portion of social security tax imposed on those wages.

Payment of Credits

Employers are entitled to receive a credit in the full amount of the qualified sick leave wages and qualified family leave wages, plus allowable qualified health plan expenses and the employer's share of Medicare tax, paid for leave during the period beginning April 1, 2020, and ending December 31, 2020.

The credit is allowed against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code and section 3221(a) of the code (the Railroad Retirement Tax Act Tier 1 rate) on all wages and compensation paid to all employees.

If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) or 6413(a) of the code. 

The qualified sick leave wages and qualified family leave wages are not subject to the taxes imposed on employers by sections 3111(a) and 3221(a) of the code and employers (other than those that are subject to the Railroad Retirement Tax Act) are entitled to an additional credit for the taxes on employers imposed by section 3111(b) of the code (Hospital Insurance (Medicare tax)) on such wages.

Employers that pay qualified leave wages will be able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allowable qualified health plan expenses and the amount of the employer's share of Medicare tax imposed on those wages, rather than depositing them with the IRS.

The federal employment taxes that are available for retention by employers include federal income taxes withheld from employees, the employees' share of social security and Medicare taxes, and the employer's share of social security and Medicare taxes with respect to all employees.

If the federal employment taxes yet to be deposited are not sufficient to cover the employer's cost of qualified leave wages, plus the allowable qualified health plan expenses and the amount of the employer's share of Medicare tax imposed on those wages, the employer will be able file a request for an advance payment from the IRS. The IRS expects to begin processing these requests in April 2020.

Employers claiming the credits for qualified leave wages, plus allowable qualified health plan expenses and the employer's share of Medicare taxes, must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for the credits, as well as retaining Form 941 Employer's Quarterly Federal Tax ReturnForm 7200 Advance of Employer Credits Due to COVID-19, and any other applicable filings made to the IRS requesting the credit.

For more detail on the refundable tax credits and the procedures to receive payment of the advance credit, see the IRS FAQ.