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March 25 2020

Client Alert - Tax Credits for Small and Midsized Employers to Recover Costs of Providing Coronavirus-Related Leave

Human resources professionals, government officials, and business leaders have been working furiously to keep apprised of developments in the quickly evolving employment law landscape as the Federal government and State of Michigan work to enact provisions to support employers and employees facing challenges related to COVID-19.

Last week, Congress passed, and the President signed, The Families First Coronavirus Response Act (the “Act”), which created the Emergency Family Medical Leave Expansion Act (the “FMLA Expansion Act”) and the Emergency Paid Sick Leave Act (the “EPSLA”).  More information regarding these acts and the employees eligible for paid leave pursuant to them is available here:  https://www.mikameyers.com/news/article/client-alert

While the Department of Labor is still working on emergency guidance and rulemaking to address certain standards set forth within the Act and to create a poster, which will need to be posted within workplaces, after addressing matters related to the health and safety of employees most employers are primarily concerned with understanding how they will obtain reimbursement under the Act for wages paid for paid leave granted.  The U.S. Treasury Department, the Internal Revenue Service, and the U.S. Department of Labor have indicated that employers extending paid leave to eligible employees under the FMLA Expansion Act and EPSLA will receive a dollar-for-dollar tax offset against payroll taxes, which are normally paid to the federal government.  Payroll taxes are deemed to include amounts withheld for federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

Employers are immediately eligible to access funds by deducting amounts for leave granted from their payroll taxes following the effective date of the acts, which is April 1.  This payroll tax credit is available for self-employed individuals as well.  Health insurance costs paid by an employer are available for deduction as a payroll expense.

To the extent the payroll tax deduction is not sufficient to cover the cost of paid leave, an employer will be able to apply for an expedited advance from the IRS.  The documentation which will need to be submitted is still being developed but is anticipated by the end of this week.  An advancement will be in the form of a future payroll tax credit.  In instances where an employer is entitled to a refund of payroll taxes paid because of paid leave used by employees, the IRS will refund such amounts to an employer as soon as possible.

The U.S. Treasury Department, the Internal Revenue Service, and the U.S. Department of Labor have provided the following example regarding how the payroll tax credit will operate:

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments, and file a request for an accelerated credit for the remaining $2,000.

Because of the importance of ensuring employers have the financial capacity to immediately fund paid leave, the IRS has indicated that good faith efforts to comply with the requirements of the Act will be subject to a 30-day non-enforcement period.  During this 30-day period, employers should work with the Department of Labor to assure they are acting in compliance with the Act.

Certain small businesses with less than 50 employees may face financial hardship as a result of the paid leave available to their employees under the Act.  Such businesses may be eligible for an exemption from the leave requirements related to school closings or childcare unavailability set forth by the Act if complying with the requirements would jeopardize the ability of the business to continue.  The Department of Labor is currently preparing emergency guidance to identify the circumstances, which will trigger this exemption.

With guidance still being developed, requirements related to the payroll tax deduction are quickly evolving.  Please contact your Mika Meyers’ attorney, Scott Dwyer, Nate Wolf, or Nikole Canute with questions.