Tax Relief Available for Small Businesses Providing Paid Leave During Pandemic

New rules aim to help employers keep workers on the payroll while ensuring that employees do not have to choose between a paycheck and public health measures

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The coronavirus pandemic has created a challenging climate for small businesses. Financial concerns are butting up against public health interests.

With that challenge in mind, the federal government recently enacted the Families First Coronavirus Response Act. The act applies to businesses with fewer than 500 employees. It allows for employees to receive paid sick leave, while giving employers the means to handle that paid leave through tax credits.

Here’s a breakdown of how it works according to information from the U.S. Department of Labor and the IRS.

For Employees

Employees can receive up to 80 hours of paid sick leave at 100% of their regular pay rate if they’re unable to work due to quarantine or they are experiencing COVID-19 symptoms and are seeking a diagnosis.

The paid leave is reduced to two-thirds of an employee’s regular wages if they’re caring for a person under quarantine, caring for a child whose school is closed, or experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services.

An employee unable to work due to the child care provision could also be eligible for an additional 10 weeks of paid leave at two-thirds of their pay.

For Employers

To assist businesses in providing employees paid sick leave, there are two new tax credits available.

With the paid sick leave credit, employers are eligible for a refund at an employee’s regular rate of pay up to $511 per day for a total of 10 days. This is for employees who are in quarantine or have COVID-19 symptoms. For paid leave related to child care, employers can claim a reimbursement for two-thirds of an employee’s regular rate of pay up to $200 per day for 10 days. Employers are also entitled to an additional tax credit based on costs to maintain health insurance coverage for the employee during the leave period.

The second available credit gives employers relief for covering paid leave for workers using the additional 10 weeks provided by the child care provision. The same rate of two-thirds of an employee’s pay up to $200 per day applies, for a total cap of $10,000.

To take immediate advantage of the credits, businesses should use funds for the paid leave that they otherwise would have paid to the IRS in payroll taxes — withheld income tax and both the employee share and the employer share of Social Security and Medicare. If those don’t sufficiently cover the cost of paid leave, however, employers can request an expedited advance from the IRS by submitting a claim form. According to the IRS, the goal is to process such claims within two weeks.

For example, a business required to pay $5,000 in sick leave that otherwise would have had to deposit $8,000 in payroll taxes can use those tax savings to make the sick leave payments. The remaining $3,000 is all that would have to be deposited for taxes.

On the other hand, if a business has the same amount of $8,000 to deposit for payroll taxes but is paying out $10,000 in sick leave, it can use the entirety of those tax savings to cover the paid leave. The business would then have to file a claim for reimbursement on the remaining $2,000.

Other Items of Note

Eligible employers can claim the tax credits based on the paid leave they provide between April 1 and Dec. 31, 2020.

Businesses with fewer than 50 employees could qualify for an exemption from the paid leave requirements related to child care if those requirements would jeopardize a business’s ability to continue.

All of the paid leave amounts are also available for self-employed individuals under similar circumstances. Credits are claimed on the income tax return.

The U.S. Department of Labor will be focusing on compliance assistance rather than enforcement for the first 30 days of the Families First Coronavirus Response Act.

Further guidance about the Families First Coronavirus Response Act and the related tax relief is available at www.irs.gov/coronavirus.



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