Voluntary FFCRA – Payroll Tax Credit

Updated January 11, 2021

Note: FFCRA Leave Requirements Expired Dec. 31, 2020, but employers can claim the FFCRA tax credit through March 31, 2021.

The Consolidated Appropriations Act, 2021 (the new COVID-19 relief bill) that was signed into law on December 27, 2020, significantly amended the Families First Coronavirus Response Act (FFCRA).

 

FFCRA Background and New Legislation

To recap, the FFCRA mandated that employers with fewer than 500 employees provide emergency paid sick leave to employees and emergency paid family leave for specified reasons relating to COVID-19. Full-time employees under the original FFCRA were entitled to a maximum of 80 hours of paid leave, with certain pay caps depending upon the reason for the leave. Likewise, an employee dealing with a school closure or unavailability of child care due to COVID was entitled to receive up to 10 weeks partially paid leave.

Employers were reimbursed through a payroll tax credit for the cost of paid sick leave and/or paid family leave for COVID-19 related reasons. The payroll tax credit applied only to qualifying leave taken between April 1 and December 31, 2020. Unless extended, the FFCRA leave mandates are set to expire on December 31, 2020.

New Legislation

With the passage of the Consolidated Appropriations Act, Congress did not extend FFCRA mandatory leave provisions, which will expire on December 31, 2020. So as of January 1, 2021, employers are no longer required to provide FFCRA leave.

However, the Appropriations Act does permit employers who voluntarily provide FFCRA leave to employees (by allowing them to complete their current FFCRA leave or take new FFCRA leave up to the employee’s original leave entitlement) to claim the FFCRA tax credit through March 31, 2021.

Employers who decide to offer the extended eligibility period for FFCRA leave to their employees should keep the following points in mind:

  1. The voluntary extension of FFCRA leave does not increase the FFCRA leave available to an employee. The Appropriations Act merely extends the deadline for use of an employee’s original FFCRA leave entitlement.
  2. The 80-hour and 10-week leave entitlements created under FFCRA have not been extended or expanded. If an employee had already exhausted their entitlement leave in 2020, the employer cannot claim the FFCRA tax credit for leave taken by that employee in 2021.
  3. Employees are not eligible to receive more leave than was provided by the FFCRA. Therefore, if an employee has exhausted their leave at a prior employer, he or she does not get further leave at a second employer.
  4. An employer should still require documentation supporting the need for leave. If audited by the IRS, the employer will then be able to establish that it followed all of the FFCRA requirements as if that law were still in effect.
  5. Since the tax credits are available for leaves taken through March 31, an employer can claim tax credits for wages paid in April for work performed in March.

 

2021 FFCRA Payroll Tax Credit

The FFCRA Paid Leave Tax Credit fully reimburses private employers with fewer than 500 employees, through payroll tax credits, for the cost of providing required paid leave to employees either for the employee’s own health needs or to care for family members.

The tax credit can be used to reduce an employer’s federal payroll liability. If the tax credit exceeds what an employer owes for that quarter, the employer can request a payment for the balance of the credit by filing IRS Form 7200.

While FFCRA mandated paid sick leave and paid family leave expired on December 31, 2020, employers who voluntarily provide FFCRA leave to employees are permitted to claim the FFCRA tax credit through March 31, 2021. No tax credits will be available to employers who pay employees amounts above the daily and aggregate caps established by the FFCRA or who provide more paid leave than the employee’s original leave entitlement.

Calculation of Expenses Eligible for the Credit

The maximum amount of the available tax credit is the amount of qualified paid leave, plus employer Medicare taxes on the leave wages, plus employer-paid qualified health plan expenses [1].

The maximum amount that can be treated as “qualified” sick leave wages paid to an employee is limited depending on the reason for sick leave. The rate is either 100% of wages up to $511/day capped at $5110 or 2/3 of wages up to $200/day capped at $2000.  The rate for family leave is 2/3 of wages up to $200 per day capped at $10,000.

By referring to the comprehensive FFCRA Paid Leave Flow Chart, employers should be easily able to calculate the qualified wages entitled to a tax credit by matching the reason for an employee’s leave with the wage rate required to be paid under the FFCRA.

Claiming Credits

Employers must report tax credits on their federal employment tax return – Form 941.

The following credits will be reported:

  • the total qualified leave wages;
  • the Medicare tax on the qualified leave wages;
  • qualified health plan expenses during the leave for that quarter.

As mentioned above, employers can use the tax credits to offset the amount the employer owes that quarter for employment taxes. Or if the amount of the tax credit is greater than what an employer owes in payroll taxes, the employer can file a Form 7200 request for accelerated payment.

Documenting Credits

The IRS requires employers to collect the following information from any employees requesting and taking leave:

  1. The employee’s name;
  2. The date or dates for which leave is requested;
  3. A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason;
  4. A statement that the employee is unable to work, including by means of telework, for such reason.

In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the government entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.

In the case of a leave request based on a school closing or child care provider unavailability, the statement from the employee should include 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, and 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.

Employers should also retain appropriate tax filings (Form 941 and 7200) as well as documentation on how the amount of qualified leave wages and qualified health plan expenses were determined.  These records should be maintained for at least 4 years after the later of the date when the taxes are due or paid.  Click here to read IRS FAQS, Covid-19 Related Tax Credits, Q&A 44, 45.

 

[1] Qualified health expenses are amounts paid or incurred by an employer to maintain a group health plan during the leave, which include the average cost of maintaining a group health plan.  For self-insured and fully insured plans, the daily average cost can be based on the Cobra premium rate.

 

See below to read additional information on FFCRA:

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