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Tax Relief and COVID-19

Federal Tax Credits for Small and Midsize Businesses

to Recover Costs of Coronavirus-Related Leave

On March 20, 2020, the U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (Labor) announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees.  https://www.irs.gov/newsroom

The Act will give all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

https://www.irs.gov/newsroom/treasury-irs-and-labor-announce-plan-to-implement-coronavirus-related-paid-leave-for-workers-and-tax-credits-for-small-and-midsize-businesses-to-swiftly-recover-the-cost-of-providing-coronavirus

Key Takeaways

  • Paid Sick Leave for Workers

For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.

  • Complete Coverage

Employers receive 100% reimbursement for paid leave pursuant to the Act.

    • Health insurance costs are also included in the credit.
    • Employers face no payroll tax liability.
    • Self-employed individuals receive an equivalent credit.
  • Fast Funds

Per IRS guidance, reimbursement will be quick and easy to obtain.  To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

    • An immediate dollar-for-dollar tax offset against payroll taxes will be provided
    • Where a refund is owed, the IRS will send the refund as quickly as possible.
  • Small Business Protection

Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

  • Easing Compliance

Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

Background

The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Paid Leave

The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.

For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld 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.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.

Examples

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.

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.

* * * *

Deferring Federal Tax Payments Due to Outbreak

The Treasury Department and Internal Revenue Service announced on March 21, 2020 that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020. https://www.irs.gov/coronavirus

This announcement comes following the President’s emergency declaration last week pursuant to the Stafford Act. The Stafford Act is a federal law enacted in 1988 and designed to bring an orderly and systematic means of federal natural disaster and emergency assistance for state and local governments in carrying out their responsibilities to aid citizens. https://home.treasury.gov/news/press-releases/sm948.

Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.  https://www.irs.gov/newsroom/tax-day-now-july-15-treasury-irs-extend-filing-deadline-and-federal-tax-payments-regardless-of-amount-owed

Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief. 

Individual taxpayers who need additional time to file beyond the July 15 deadline, can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. https://www.irs.gov/pub/irs-pdf/f4868.pdf  

Businesses who need additional time beyond the July 15 deadline must file Form 7004.  https://www.irs.gov/pub/irs-pdf/f7004.pdf

Even with the filing deadline extended, the Treasury Department and IRS urge taxpayers who are owed refunds to file as soon as possible and file electronically:  

Americans should file their tax returns by April 15 because many will receive a refund.  Those filing will be able to take advantage of their refunds sooner,” said Treasury Secretary Steven T. Mnuchin.  “This deferment allows those who owe a payment to the IRS to defer the payment until July 15 without interest or penalties.  Treasury and IRS are ensuring that hardworking Americans and businesses have additional liquidity for the next several months. 

https://home.treasury.gov/news/press-releases/sm948

For More Information

For more information regarding federal tax credits and other relief, visit Coronavirus Tax Relief on IRS.gov. Information regarding the process to receive an advance payment of the credit will be posted on IRS.gov next week.

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State and Local Tax Relief Varies

Not all states or localities are allowing the same tax payment and filing relief as the federal government.  

As of March 19, 2020, the Commonwealth of Virginia will not follow the federal government’s 90-day delay.  Virginia will allow all individuals and businesses to delay paying their 2019 income taxes by 30 days, bumping the deadline to pay from May 1 to June 1.  https://www.richmond.com/news/virginia/virginia-to-extend-may-tax-deadline-for-all-individuals-and/article_1cfc9aac-cac4-5522-9440-d85f88bf03fe.html

In an interview with the Richmond Times-Dispatch, Virginia Finance Secretary Aubrey Layne said that unlike the federal government, Virginia is required to have a balanced budget, “There’s a big difference between us and the federal government. We can’t print money.  We can’t extend it as far. We’re looking at ways to help our impacted taxpayers, but what the feds have done won’t work for us.”  https://www.richmond.com/news/virginia/virginia-to-extend-may-tax-deadline-for-all-individuals-and/article_1cfc9aac-cac4-5522-9440-d85f88bf03fe.html

However, Layne noted that further relief could come if Congress rolls out a safety net for states.  https://www.richmond.com/news/virginia/virginia-to-extend-may-tax-deadline-for-all-individuals-and/article_1cfc9aac-cac4-5522-9440-d85f88bf03fe.html

Given the fluidity of the current situation and the variations between states and localities, it is important to check with your state and/or locality for the latest information.  

For more information on this article, please contact Alison Feehan (afeehan@setlifflaw.com) at 804-377-1299 or Steve Setliff (ssetliff@setlifflaw.com) at 804-377-1261.