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COVID-19 | FFCRA Emergency Family Medical Leave Payroll Tax Credit

COVID-19 | FFCRA Emergency Family Medical Leave Payroll Tax Credit

FFCRA stands for The Families First Coronavirus Response Act which was signed by President Trump on March 18, 2020. In brief, It provides small and mid sized employers refundable tax credits that reimburse them, dollar for dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. 

To businesses with fewer than 500 employees, FFCRA provides funds to employees with paid sick leaves and family and medical leave for reasons related to Covid-19. This is for employees’ own health needs or to take care of their family members. 

As per FFCRA, workers may receive a paid sick of leave of 80 hours for their own health needs or to take care of others and additional 10 weeks of paid leave to take care of a child whose school or place of care is closed or child care provider is closed or it’s unavailable due to Covid-19 precautions. The FFCRA takes care of all these paid leaves by providing small businesses with refundable tax credits. Certain self-employed individuals with similar circumstances are entitled to similar credits. 

Also Read – Ways to Maximize your Tax Benefits During Covid-19

Overview of Paid Family Leave Refundable Credit: 

 

The FFCRA requires small size and midsize businesses to provide paid leave through two separate provisions:

  • The Emergency Paid Sick Leave Act (EPSLA):

This act entitles workers upto 80 hours of paid sick leave when they are unable to work for certain reasons related to COVID-19.

  • The Emergency Family and Medical Leave Expansion Act (Expanded FMLA):

This act entitles workers to certain paid medical or family leave. 

Paid Sick Leave refers to paid leave under the Emergency Paid Sick Leave Act. Expanded Family Medical Leave refers to paid leave under the Emergency Family and Medical Leave Expansion Act.  The FFCRA’s paid leave provisions are effective from April 1, 2020, and apply to leave taken between April 1,2020 and December 1, 2020. 

Here, we will talk about Expanded FMLA. The FFCRA provides that employers subject to the EPSLA and Expanded FMLA paid leave requirements are entitled to fully refundable tax credits to cover the cost of the leave required to be paid for these periods of time during which employers are unable to come to work including telework. Eligible employers are entitled to refundable tax credits for collectively qualified sick leave wages and Family leave wages under sections 7001 and 7003 of the FFCRA respectively. It can be because of the need to take care of a child whose school or place of care or child care center is closed due to Covid-19 precautions. 

This is entitled to paid family and medical leave equal to two thirds of the employees regular pay, multiplied by the number of hours the employee otherwise would have scheduled to work, up to $200 per day and $10,000 in the aggregate for the calendar year. Also, upto 10 weeks leave can be counted towards the family leave credit. 

The eligible employee is entitled to a fully refundable tax credit equal to the 100% of the  required paid family and medical leave. The tax credit also includes the eligible employer’s share of Medicare tax imposed on those wages and cost of maintaining health insurance coverage for the employee during the family leave period. However, the eligible employer is not subject to the employer portion of social security tax imposed on those wages. 

You May Also Read – How to Get a Small Business Disaster Loan During COVID-19?

What is included in “ Qualified Family Leave Wages”

As defined in section 3121 (a) of the Internal Revenue Code for social security and Medicare tax purposes, Qualified Family Leave Wages are wages that eligible employers must pay eligible employees for period of leave during which they are unable to work or telework due to need for leave to care for a child of such employee if the child’s school or place of care or child care center is closed due to Covid-19 precautions. The first 10 days for which an employee takes leave for these reasons may be unpaid. However, during that 10-day period, an employee must be entitled to receive qualified sick leave wages as provided under the ESPLA or may receive other forms of paid leave, such as annual leave, accrued leave, or other paid time off under the legible Employer’s policy. After an employee takes leave for ten days, the Eligible Employer must provide the employee with qualified family leave wages for up to ten weeks.

Other than qualified family leave wages included in the tax credit for required paid family leave, the credit also includes the amount of the Eligible Employer’s share of Medicare tax imposed on the qualified family leave wages and any qualified health plan expenses allocable to those wages. Under section 106 (a) of the Internal Revenue Code, Qualified health plan expenses are amounts paid or incurred by the Eligible Employer to provide and maintain a group health plan to the extent that the amounts are excluded from the employee’s gross income. 

Kindly Note: The credit for the employer’s share of Medicare tax does not apply to Eligible Employers that are subject to Railroad Retirement Tax Act (RRTA) because qualified Family Leave Wages are not subject to Medicare Tax under RRTA. 

Qualified reasons for leave:

Under FFCRA, an employee is eligible for paid sick leave if an employee is unable to work or tele work due to need for leave because of the following:

  • The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19
  • The employee has been advised by a health care provider to self-quarantine related to COVID-19
  • The employee is experiencing COVID-19 symptoms and is seeking a medical diagnosis
  • The employee is caring for a child whose school or place of care is closed or child care provider is unavailable for reasons related to COVID-19 
  • The employee is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.

How to claim sick leave as credit?

Eligible employers who pay sick leave or child care leave will be able to retain  an amount of their federal payroll taxes equal to the amount of qualifying sick and/or child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include:

  • Federal Income Tax Withheld
  • ER and EE Portion of Social Security Tax
  • ER and EE Portion of Medicare Tax  

The U.S. department of labor will be implementing the above regulations. The department will also continue to provide compliance assistance to employers and employees on their responsibilities and rights under the FFCRA. 

New Guidance Issued on PPP Loan Forgiveness

New Guidance Issued on PPP Loan Forgiveness

On June 16, 2020, The Small Business Administration (SBA), released new loan forgiveness application forms and corresponding instructions for borrowers seeking forgiveness of their Paycheck Protection Program (PPP) loans.They also unveiled a new EZ form for forgiveness of PPP loans. 

On June 17,2020, SBA also released a new interim final rule #19 providing updated guidance on the use of PPP loan proceeds and loan forgiveness. These updated materials implement and clarify aspects of the recently enacted Paycheck Protection Program Flexibility Act (PPPFA) which changed several aspects of PPP loan and the calculation of loan forgiveness. 

The new guidance issued on PPP loan forgiveness and interim final rule #19 are provided below:

Key Takeaways:

  • Guidance issued on PPP loan forgiveness continues to be inconsistent. The new loan forgiveness application forms use a calculation that would exclude interest from the calculation of loan amount to be forgiven. 
  • Previously SBA had rolled out the “Alternative Payroll Covered Period” for the convenience of borrowers but the concept has been extended for borrowers who use the new 24 week covered period. However, this is available only for borrowers whose regular payroll cycle is biweekly or more frequent. 
  • Eligible amounts paid during the covered period but incurred earlier, can be included in the loan forgiveness amount. The language that created uncertainty in this point has been revised accordingly. 
  • The per employee limit or cash compensation eligible for loan forgiveness is adjusted for borrowers using the 24 week covered period, from $15385 ( 8 week covered period)  to $46154 (24 week covered period) However, the compensation for business owners using a covered period of 24 weeks are subject to lower limit of $20833 across all of their businesses. 
  • Borrowers who qualify for the newly – release EZ form of PPP loan application do not require to submit full detailed information of their employee and cash compensation and hours worked however, borrowers who are not eligible to use the EZ form are required to provide detailed information of every employee. 
  • The PPPFA safe harbor for employers who were unable to operate their businesses at the same level of activity as before February 15, 2020 refers to only guidance or requirements from CDC, OSHA or HHS. It does not include guidance or restrictions issued by state, city, county or other local authorities. 

Also Read – Tax Calendar 2020 for Individuals

Overview:

Prior to June 5, 2020 PPPFA allowed borrowers to obtain PPP loans to elect a 24 week covered period instead of the original 8 week covered period for PPP loan forgiveness. But this extended period has other consequences such as extending the period in which certain use restrictions apply to the PPP loan and extending the measurement period for headcount , wage reductions and salary. But after June 5, 2020 borrowers obtained PPP loans must use a 24 week covered period. These changes were partially intended by SBA’s interim rule #17 but the latest guidance provides additional clarification. 

The new guidance issued on PPP loan forgiveness reflects changes to PPP loans authorized by PPPFA, which includes reduction in the percentage of PPP loan proceeds that must be used for payroll costs from 60% from 75% and the new safe harbours of PPP borrowers who are unable to restore or rehire the wage or salary of an employee or resume their pre-February 15, 2020 level of business activity they had before Covid-19 pandemic due to compliance with health and safety guidelines for slowing the spread of the virus. 

SBA has also included the new EZ form and corresponding instructions that simplify and streamline the process of applying for loan forgiveness for certain borrowers that qualify to use the EZ form. 

Also Read – A Beginners Guide To General Ledger

New Interim Final Rule Published:

The CARES Act indicated PPP loan proceeds had to be spent on specific eligible expenses to qualify for loan forgiveness. This includes payroll costs, payment of covered rent obligations, payment of interest on covered mortgage obligations and covered utility payments. The new loan forgiveness interim final rule #19 by SBA are:

  1. Amounts incurred or paid during the covered period are qualified to be included. The language that created uncertainty in this point has been revised accordingly. 
  2. The SBA issued rules for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24 week covered period. 
  3. The PPP act tripled the duration during which PPP recipients could spend the fund and still be eligible for loan forgiveness. This span of time is called the covered period. 
  4. The interim rule #19 adjusts and adds to previous guidance for calculating loan forgiveness under the original 8 week covered period. 
  5. The new interim rule establishes a 24 week covered period for full loan forgiveness at $46154 per individual. 

Application highlights:

  1. Health insurance costs for S corporation owners are not included when calculating payroll costs however, retirement costs for S corporation is eligible for payroll costs. 
  2. Borrowers that received a loan before June 5, 2020 can choose between 8 week or 24 week covered periods. 
  3. Borrowers don’t have to wait till Dec. 31 to apply for forgiveness to use the safe harbour. This is a relief for the borrowers who may be required to reduce the salaries and wages, they can restore before applying for loan forgiveness. 

New EZ application details:

The EZ form requires fewer calculations and less documentation than the full application. The EZ application can be used by borrowers that:

  • Are self-employed and have no employees
  • The borrowers who did not reduce the wages or salaries of their employees by more than 25% and also did not reduce the number of working hours
  • Experienced reductions in business activity levels due to health derivative related to COVID-19

Other Provisions:

  • All the loans made on or after June 5, 2020 the minimum term for PPP loan is raised to five years. For loans made before 5th June 2020, the two year minimum maturity remains in effect unless both the lender and the borrower agrees to extend it to five years. 
  • The application deadline to PPP loans remains to be 30th June. 
  • The proportion of PPP loan that must be used on payroll costs to be eligible for forgiveness drops to 60% from 75%