Tax Credits Provided to Small Businesses

Summary of Keypoints

• Overview of FFCRA tax credits for small businesses: The Families First Coronavirus Response Act requires small businesses to provide paid sick leave and emergency family and medical leave, while offering refundable payroll tax credits to offset the cost of these required wages.
• Scope and timing of credits: The FFCRA provides a 100% payroll tax credit for qualified sick leave wages under the EPSLA and qualified family leave wages under the EFMLEA, applicable to wages paid beginning in late March 2020 and ending December 31, 2020.
• Paid sick leave tax credit details: Employers may claim a credit equal to 100% of qualifying paid sick leave wages, subject to statutory limits, including a maximum of 10 days per employee per year, with credits increased by allocable qualified health plan expenses and claimed on quarterly payroll tax returns.
• Paid family and medical leave tax credit details: Employers may claim a quarterly credit equal to 100% of qualified family leave wages, limited to $200 per day and $10,000 total per employee, with similar income inclusion rules to prevent double tax benefits.
• Refundability and self-employed eligibility: Both credits are refundable to the extent they exceed payroll or self-employment tax liabilities, and comparable refundable credits are available to self-employed individuals, with wages used for one FFCRA credit excluded from use in the other.

The Family First Coronavirus Response Act requires Small Businesses to provide Emergency Family and Medical Leave, and Paid Sick Leave for employees.

It also provides tax credits to small businesses.

The FFCRA includes a 100 percent payroll tax credit for qualified sick leave wages paid under the EPSLA and for qualified family leave wages paid under the EFMLEA. There are tax credits for employers and self-employed taxpayers and FICA tax relief for employers.

The credits and exclusions apply only to wages paid (a) beginning on a date selected by the Secretary of the Treasury (within 15 days following March 18) and (b) ending December 31, 2020.

Employers are eligible for tax credits to cover wages paid to their employees who receive paid sick or family leave. These credits are taken against the employer’s portion of FICA and from self-employment taxes for self-employed individuals.

Paid Sick Leave Tax Credit

The total sick leave tax credit for each employer is equal to 100% of the total qualifying paid sick leave wages paid for each of its employees during the calendar quarter provided that the credit cannot exceed the limits on amounts payable under EPSLA and EFMLEA.

The employer’s paid sick time payroll tax credit is claimed on a quarterly basis, presumably on the employer’s quarterly payroll tax returns (IRS Form 941). To avoid a double tax benefit, an employer is required to increase its gross income for the taxable year by the amount of the total sick leave credit received.

The amount of sick leave credit is increased by the portion of an employer’s “qualified health plan expenses” allocable to the employer’s qualifying sick leave wages. “Qualified health plan expenses” are amounts an employer pays or incurs to provide and maintain a group health plan, to the extent these amounts are excluded from the taxable gross income of employees.

For self-employed individuals there are similar refundable credits against self-employment taxes.

The total number of paid sick leave credit days is limited to 10 days per employee, for any taxable year.

This credit is refundable to the employer or self-employed individual to the extent it exceeds the total amount the employer owes in payroll taxes. Wages used in calculating an employer’s paid sick leave credit cannot be used to determine the credits related to paid family and medical leave.

Paid Family and Medical Leave Tax Credit

Employers are also allowed a credit each calendar quarter for an amount equal to 100% of “qualified family leave wages” the employer pays by reason of the emergency expansion of required family and medical leave under the provisions of the FFCRA.

Where employers pay more than the required minimum, the credit is limited to (a) up to $200 per day paid, and (b) a total of $10,000 in all calendar quarters for each employee. Again, to avoid a double tax benefit, the employer is required to increase its gross income for the taxable year by the amount of the total family and medical leave credit received.

Self-employed individuals are also allowed a credit against self-employment taxes.

This credit is refundable to the extent it exceeds the total amount the employer owes in payroll tax or the self-employed individual owes in self-employment tax. Ay wages considered in determining the family and medical leave credit cannot be used to determine the amount of credits related to paid sick leave under the FFCRA.