What Employers Need to Know about the Family and Medical Leave Tax Credit

The Coronavirus Aid, Relief, and Economic Security (CARES) Act garnered most of the tax headlines last year. But another new law passed just a matter of days before the CARES Act—the Family First Coronavirus Response Act (FFRCA)—created a new tax credit for employers that provide paid leaves to employees affected by the COVID-19 pandemic. Now the Consolidated Appropriations Act (CAA) extends and modifies this valuable tax credit.

Background: Under the FFCRA, certain employers are eligible for tax credits on their 2020 returns. The FFCRA credit can be claimed for the costs of providing employees with paid sick leave and expanded family and medical leave for reasons relating to the COVID-19 pandemic for the period spanning April 1, 2020 through December 31, 2020.

The credit is available to businesses and tax-exempt organizations employing less than 500 employees at the time the leave is taken. The Department of Labor (DOL) has issued guidance on the rules for the 500-employee threshold.

The FFCRA credit offsets the Social Security tax component of federal payroll taxes. Eligible employers could claim the credits on their employment tax returns or benefit faster by reducing their federal payroll tax deposits. If the employer doesn’t have sufficient payroll taxes to cover the amount of the credits, it may request an advance payment of the credits from the IRS.

If the amount of the credits exceeds the employer portion of the Social Security tax on all wages paid to all employees for any quarter, the excess is treated as an overpayment. This amount will then be refunded to the employer.

Emergency paid leave must be offered to all employees regardless of how long they have been employed by the company. This applies to employees who are unable to work and meet any one of the following conditions:

The employee is subject to a quarantine relating to COVID-19.
The employee has been advised to self-quarantine relating to COVID-19.
The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
The employee is caring for an individual who is subject to quarantine.
The employee is caring for a child if the school or a childcare provider is closed.
Any other substantially similar condition specified by the Health and Human Services (HHS) department.

Full-time employees are entitled to take up to 80 hours of paid sick leave. Part-time employees are entitled to a leave equal to the number of hours that he or she works on average over a two-week period.

Update: As stated above, the FFCRA credit was scheduled to expire on December 31, 2020. Now the CAA extends it through March 31, 2021 with certain modifications.

Notably, employers are no longer required to provide paid sick leave or expanded FMLA paid leave to employees due to the COVID-19 pandemic, while employees are no longer entitled to paid leave under the FFCRA. But employers may voluntarily choose to provide paid such leaves to these workers. If they are do, they can pocket tax credits for amounts paid through March 31, 2021.

Be aware that there are several other wrinkles to the FFRCA credit. Contact your professional tax advisor for more details.