Employers can use payroll tax credits for paid leave for coronavirus

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The Treasury Department, the Internal Revenue Service and the Labor Department said small and midsized employers can start taking advantage of two new refundable payroll tax credits aimed at immediately reimbursing them, dollar for dollar, for the cost of providing coronavirus-related leave to their employees.

The relief was included as part of the Families First Coronavirus Response Act that was signed into law last week.

U.S. businesses with fewer than 500 employees can use the funds to provide employees with paid leave, either for the employee’s own health care needs or to care for their family members. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and Dec. 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

For COVID-19-related reasons, employees will be able to 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. Health insurance costs are included in the credit. Employers won’t face any payroll tax liability. Employers will receive 100 percent reimbursement for paid leave.

To take advantage of the paid leave credits, businesses can keep and access funds they would otherwise pay to the IRS in payroll taxes. If those amounts aren’t enough 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.

For an employee who’s unable to work because of coronavirus quarantine or self-quarantine or has coronavirus symptoms and is seeking a medical diagnosis, eligible employers can 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’s 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 coronavirus, eligible employers can 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.

Along with the sick leave credit, for an employee who’s unable to work because of a need to care for a child, eligible employers can receive a refundable child care leave credit. The 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.

President Trump had initially favored a payroll tax cut for employees and employers, but that sparked criticism that the money would deplete the Social Security Trust Fund and Medicare funds, and the benefits would not be felt so soon. The administration and Senate Republicans have instead pivoted to the idea of giving out $1,200 stimulus checks to individuals, $2,400 to married couples and an extra $500 for each child in the family (see our story). The amount of the so-called “recovery checks” would phase out for higher-income taxpayers. The plan would also delay the payment of employer payroll taxes. However, Republicans and Democrats in the Senate remain divided over several aspects of the $2 trillion package, and it failed to advance in the Senate on Sunday.

Distribution issues

When the stimulus package is ultimately passed, it will be up to the Treasury and the IRS to distribute the money. But that could take months, given the limited staff, budget cuts and antiquated technology systems at the IRS and experience from past efforts to distribute stimulus payments and tax rebate checks. According to Reuters, it took more than six weeks to distribute tax rebate checks in 2001 and almost three months to distribute stimulus payments in 2008.

Tax experts saw some advantages and disadvantages to the initial payroll tax cut concept.

Tim Speiss, co-leader of the Private Wealth Group at Top 100 Firm EisnerAmper, pointed to the payroll tax cuts that the Obama administration put in place for two years in response to the financial crisis, temporarily reducing both taxes from 6.2 percent to 4.2 percent. Under the Trump administration’s original proposal, the 6.2 percent payroll tax would go down to zero percent for the rest of the year.

“That could create a fair amount of savings,” said Speiss. “At 12 percent, you’re looking at something over $14,000 in potential tax abatements that an individual could use, spend and put back into the economy. Half of that amount would also allow a corporation to do the same thing. The real intent is to put money into the economy.”

Roger Brown, former special counsel in the IRS’s national office and head of tax and regulatory affairs at the blockchain technology company Lukka, doesn’t think a payroll tax cut would be as effective as other stimulus measures.

“I do think there are other things that Congress could do to help the middle class to deal with this economic downfall,” he recently told Accounting Today. “What was very unpopular in many states was limiting the state and local tax deduction to $10,000. For many people that was a tax increase at the federal level on people in the coastal states. Next, the R&D credits that are available could be partially targeted to the coronavirus. We should lift those caps, and rather than a simple tax cut, why not increase the tax credit that people could take? A payroll tax cut isn’t the only mechanism. You need to look at other liquidity raisers. They should allow people to take money out of 529 plans without penalty for the current year and allow for increased contributions to IRAs.”

One of the proposals in the Republican plan for the current stimulus package currently under consideration is waiving the 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes.

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