Updated April 4, 2020

Effective April 1, the Families First Coronavirus Response Act (FFCRA or Act) requires certain private sector employers with fewer than 500 employees and governmental employers of all sizes to provide their employees with emergency paid sick leave and emergency paid medical leave. More information about the FFCRA is available here.

Given the current unknowns, many employers are evaluating the financial implications of the Act’s expansive mandatory paid leave and making difficult decisions, including reducing head count.

To incentivize employers (in particular, those deemed essential under various shelter orders) to retain their employees and bear the costs of emergency paid leave, the FFCRA offers covered employers a refundable payroll tax credit. This tax credit offsets the cost of the paid leaves required under the Act, and could make all the difference for certain businesses concerned that the cost of these paid leaves will run them out of business. Here’s how it works.

Which employers are eligible for the tax credit?

The tax credit is available to employers with fewer than 500 employees who provide emergency paid sick leave or emergency paid family and medical leave as required under the FFCRA. Whether an employer employs fewer than 500 employees is determined on a “snapshot” basis; that is, if, after April 1, the employee head count drops below 500, the employer will be required to comply with the Act as of that date and will become eligible for the credit. Self-employed individuals can also receive the tax credit.

How much is the tax credit?

The tax credit is equal to 100 percent of the amount the employer pays in emergency paid sick leave and emergency paid family and medical leave, including a portion of the costs of providing group health plan coverage that are allocable to such leave payments, up to the FFCRA-established per-employee caps.

What are the per-employee caps?

The amount of the per-employee cap depends on the circumstances triggering the emergency paid leave. In each instance, the employee must be unable to work remotely (either because the employer or the job does not permit it, or because the employee is unable to accomplish such telework due to the COVID-related leave reason).

  1. If an employee takes emergency paid sick leave because:

a. The employee is subject to a government quarantine or isolation order related to COVID-19;

b. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or

c. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis, then the tax credit is equal to the employee’s regular rate of pay, up to $511 per day, for a maximum of 10 days, or $5,110 in the aggregate per employee.

Example 1: Employee takes emergency paid sick leave because he has coronavirus symptoms and is awaiting a medical diagnosis. Employee is a full-time employee who works eight hours per day, with a regular rate of pay of $40 per hour. Employee misses work for 10 days, and receives 10 days of emergency paid sick leave. Therefore, Employer will receive a $3,200 tax credit (8 hours per day x $40 per hour x 10 days).

   2. If the employee takes emergency paid sick leave because:

a. The employee is caring for an individual who is subject to a government quarantine or isolation order related to COVID-19, or who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or

b. The employee is caring for a child whose school or place of care is closed or whose childcare provider is unavailable due to COVID-19 precautions,

then the tax credit is equal to two-thirds of the employee’s regular rate of pay, up to $200 per day, for a maximum of 10 days, or $2,000 in the aggregate per employee.

Example 2: Employee takes emergency paid sick leave because he must stay home to care for his spouse who has been advised by a health care provider to self-quarantine due to COVID-19 concerns. Employee works eight hours per day, with a regular rate of pay of $30 per hour. Employee misses work for 10 days and receives 10 days of emergency paid sick leave. Therefore, Employer will receive a $2,000 tax credit (8 hours per day x $30 per hour x 10 days = $2,400, but the amount is subject to the $2,000 cap).

  3. If the employee takes emergency family or medical leave (or both) because the employee is unable to work due to the need to care for a child whose school or place of care has been closed or whose childcare provider is unavailable due to COVID-19, then the tax credit is equal to two-thirds of the employee’s regular rate of pay, up to $200 per day for a maximum of 10 additional weeks, or $10,000 in the aggregate per employee.

Because an employee may use both emergency paid sick leave and emergency paid family and medical leave to care for a child whose school or childcare provider is closed due to COVID-19, the total tax credit cap for such an employee is $12,000 in the aggregate.

Example 3: Employee’s child’s day care closes because of COVID-19, and Employee cannot find anyone to take care of her child, nor can Employee work remotely. Employee misses work for 12 weeks. Employee’s regular rate of pay is $70 per hour, and she works eight hours per day. Because Employee is eligible for both the 10 days (two workweeks) of emergency paid sick leave as well as 10 weeks of emergency paid family and medical leave, she may receive paid leave for a total of 12 weeks. Therefore, Employer will receive a $12,000 tax credit (($200 per day cap x 2 weeks (10 days)) + ($200 per day cap x 10 weeks)).

What must an employer show to receive the tax credit?

In order to claim the tax credit, employers must be able to demonstrate that the amounts paid to employees for emergency paid sick leave and emergency paid family and medical leave were for qualifying reasons under, and subject to the limits of, the FFCRA. Any leaves provided over and above the requirements of the FFCRA are not eligible for the tax credit, so employers being more generous (whether as an assistance to their employees or due to confusion about the Act’s requirements) are not eligible to recoup those costs.

At a minimum, the employee must provide a signed statement containing:

  • The employee’s name;
  • The date(s) for which leave is requested;
  • The COVID-19 qualifying reason for leave; and
  • A statement representing that the employee is unable to work or telework because of the COVID-19 qualifying reason.

Further, the employee must provide additional documentation or information depending on the COVID-19 qualifying reason for leave:

  • An employee subject to a federal, state, or local quarantine or isolation order related to COVID-19 must provide the name of the government entity that issued the quarantine or isolation order to which the employee is subject.
  • An employee who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19 must provide the name of the health care provider.
  • An employee who is caring for an individual who is subject to a governmental quarantine or isolation order or who has been told by a health care provider to self-quarantine must provider either (1) the government entity that issued the quarantine or isolation order to which the individual is subject, or (2) the name of the health care provider who advised the individual to self-quarantine.
  • An employee who is requesting emergency paid sick leave or expanded family and medical leave to care for his/her child whose school or place of care is closed, or whose child care provider is unavailable due to COVID-19 must provide (1) the name of the child being cared for; (2) the name of the school, place of care, or child care provider that closed or became unavailable due to COVID-19; and (3) a statement representing that no other suitable person is available to care for the child during the period of requested leave.

The Department of Labor’s temporary rule regarding the FFCRA does not indicate what information, if any, an employee must provide if he or she requests emergency paid leave because he or she is experiencing symptoms of COVID-19 and seeking a medical diagnosis. So, employers who receive an employee request for this reason should not ask for additional documentation or information beyond the minimum information in the signed statement.

If an employee provided oral statements to support his or her request for leave, the employer is required to document those statements. And, if an employee’s leave request is denied, the employer must document the determination by an authorized officer that it is eligible for such exemption. This documentation and information should be kept in a separate, confidential file for each employee for record-keeping purposes, and must be maintained for four years. Additionally, employers should establish separate leave codes to assist in tracking FFCRA-specific leave for timekeeping purposes, and should partner with their payroll providers if applicable.

The Department of Labor’s temporary rule also indicates that the following records are recommended, but necessarily required, for an employer to claim the tax credit:

  • Documentation showing how the employer determined the amount of paid leave paid to eligible employees, including records of work, telework, paid sick leave, and expanded family and medical leave;
  • Documentation showing how the employer determined the amount of qualified health plan expenses that the employer allocated to wages;
  • Copies of any completed IRS Forms 7200 the employer submitted to the IRS;
  • Copies of the completed IRS Forms 941 the employer submitted to the IRS or, for employers using third-party payers to meet employment tax obligations, records of information provided to the third-party payer regarding the employer’s entitlement to the credit claimed on IRS Form 941; and
  • Other documents needed to support the request for tax credits pursuant to any applicable IRS forms, instructions, and information concerning claiming a tax credit.

Additional guidance from the IRS relating to the tax credit is available here.

Can an employer still claim the tax credit if an employee supplements FFCRA leave with paid time off?

 The FFCRA allows employees to use existing paid vacation, personal, medical, or sick leave already provided to them under their employer’s paid leave policy to supplement their leave under the FFCRA. Some employees may choose to do this if, for example, they would normally receive more under their employer’s paid time off (PTO) policy than they would under emergency paid sick leave or emergency paid family and medical leave. Employers can pay their employees in excess of the FFCRA’s requirements; however, they cannot claim a tax credit for those amounts in excess of the FFCRA’s statutory limits. Employers are not required to allow employees to supplement their paid sick leave or expanded family and medical leave with PTO.

How does an employer recover the tax credit?

 Tax credits are claimed on the employer’s quarterly Form 941, which is used to report and deposit required tax withholdings. The employer is eligible to offset the eligible credit amount against any federal tax obligation it otherwise has on such Form 941 (that is, federal income tax withheld from employee paychecks and the employer’s and employee’s portion of Social Security and Medicare taxes with respect to all employees, not just those on leave). This eliminates the lag that would otherwise be required if the employer were obligated to pay such wages and applicable withholdings, and then wait for the government to process a credit. If the amount of the credit exceeds the amount the employer is otherwise required to deposit with Form 941, a refund will be issued promptly.

Because the tax credits are against payroll tax liabilities, even employers that are not subject to income tax may obtain government funding of FFCRA-required leave, and the above-referenced expedited procedures will dramatically reduce the cash flow concerns associated with employers being obligated to pay wages currently but having to wait for reimbursement from the government.