Tax Credits and COVID-19: The IRS Weighs In

On March 31, 2020, the Internal Revenue Service (the “IRS”) issued the much-awaited “COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Mid-Size Businesses FAQs: https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs.

Section 7001 of the new Families First Coronavirus Response Act (the “FFCRA”) provides that paid sick leave or extended family and medical leave under the FFCRA will be reimbursed to the employer immediately through an immediate, dollar-by-dollar reduction in payroll taxes for each dollar spent on leave under these provisions. Accordingly, the IRS guidance is unusually important for employers making employment decisions regarding the FFCRA. Below is a summary of some of the more important questions the IRS has attempted to clear up.

The key take away for employers is that even in the midst of a pandemic, government bureaucrats will still be looking for documentation—from both the employer and employee—to support any request for reimbursement.

Documentation to be Provided by the Employee (FAQ #44)

Employers must obtain written documentation from an employee in order to obtain tax credits for the employee’s leave under the FFCRA. The employer must obtain a written statement from the employee that contains at least the following information:

  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; and
  4. A statement that the employee is unable to work, including by means of telework, for such reason.

Additional requirements apply if the leave is taken for childcare purposes (discussed below), and, if the leave is taken due to a quarantine order or self-quarantine advice, the statement should also include the name of the government entity issuing the order or healthcare professional issuing the self-quarantine advice.

The employer should also retain records showing how it determined the amount of qualified sick and/or family leave wages payable to the employee; the amount of qualified health plan expenses allocated to wages; and copies of IRS Forms 7200 and 941 submitted to the IRS to claim the credits. These records must be maintained for at least four (4) years after the tax becomes due or is paid, whichever is later.

On April 1, the DOL issued a temporary rule that generally echoes the IRS in terms of what documentation the employee should provide. The DOL’s rule notes that the employee’s statement that he or she is unable to work for the qualified reason can be “oral or written,” but employers should always attempt to obtain that statement in writing to comply with the IRS’ requirements.

The real world challenge for employers will be how to appropriately respond to employees in the middle of this crisis who are either unwilling or unable to provide the documentation that the IRS deems necessary. The first step is a clear written request to the employee for the desired information. If the employee cannot provide the information, it will be important to document what information the employee is able to provide. That information could include the employee’s name and dates for which the employee requested leave, along with emails and contemporaneous notes of verbal conversations with the employee that may provide some of the information called for by FAQ #44.

Limits on Childcare Leave (FAQ #44)

If leave is taken due to school closure or the unavailability of a childcare provider, the employee must identify the name(s) and age(s) of the child or children to be cared for and for each, the name(s) of the school or childcare place that has closed or childcare provider that is unavailable. Notably, the employee must also provide a written representation that no other person will be providing care for the child or children for whom leave is sought, and if the child is older than 14 and the childcare is required during daylight hours, the employee must certify that special circumstances exist requiring that employee to provide care.

Thus, in two-parent or two-caregiver households, only one caregiver may take leave to care for the child(ren) at a time. If an employee has a stay-at-home spouse or a partner who is already taking leave to care for their child(ren), that employee may not also take leave. Further, the IRS considers children aged 15 or older to be capable of caring for themselves, at least during daylight hours, unless they have special needs that require adult supervision.

Note that this guidance only appears to apply in the situation where an employee is seeking leave because their child’s school or place of care is closed, or care provider is unavailable not to care for a child or other person who themselves are subject to a quarantine order or self-quarantine recommendation from a healthcare provider.

The DOL’s April 1 temporary regulations confirms the IRS’ interpretation that an employee taking childcare leave must be the only one providing care to that child during the hours for which leave is taken. Notably, however, the DOL’s regulations do not mirror the IRS regarding children between 15 and 18 years of age, and in fact appear to contradict it, making childcare leave available to parents of qualifying children 18 years or younger without further qualification. As a practical matter, then, employers should attempt to collect from the employee all of the documentation that the IRS requires, but should recognize that they may need to provide leave to employees even if their children are 15 years of age or older.

Qualified Health Care Plan Expenses (FAQ #31-36)

Employers can also include the amount of qualified health care plan expenses allocated to the leave in the credits. Both the amount paid to a group health plan by the employer and the pre-tax amounts paid by the employee should be taken into account in determining the amount of qualified health care plan expenses. If the same employee participates in more than one plan, the expenses with respect to both are to be included.

How and When to Claim the Tax Credits (FAQ #2, 5, 37-43)

Any employer with fewer than 500 employees that is required to pay qualified sick leave or family and medical leave wages can claim the tax credits between April 1, 2020 and December 31, 2020, by claiming the credits on their federal employment tax returns (e.g. Form 941). If the federal employment taxes otherwise due are less than the amount of credits to which the employer is entitled, the employer may request an advance on future tax credits by filing a Form 7200 with the IRS, available here: https://www.irs.gov/forms-pubs/about-form-7200.

An employer can fund qualified leave payments, along with qualified health care expenses and the employer’s share of Medicare tax on the qualified leave wages, by reducing its quarterly deposits to the IRS for tax purposes, in anticipation of receiving tax credits on those taxes. An employer cannot be subject to penalties for reducing its tax deposits in this manner, so long as it also does not attempt to claim an advance for the same credits.

We will continue to inform you of changes as they occur. If you have questions regarding employee family and medical leave or paid sick leave under the FFCRA, other governmental responses to the COVID-19 pandemic, or strategies to respond to the pandemic, please contact Martin Kappenman (952-921-4603 or mkappenman@prkalaw.com), William Parker (952-921-4602 or wparker@prkalaw.com), or any other attorney at Peters, Revnew, Kappenman & Anderson, P.A.

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