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How it will work for employers paying COVID paid leave

Updated: Apr 6, 2020

-- including a correction to today's earlier post

Per the IRS release:

“Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS.

The IRS expects to process these requests in two weeks or less…… “

Though the details are not out yet – and inasmuch as this is federal law, and that State payroll taxes are also involved – here is a likely example of how it will work in real life:

Sorry to say it is not pretty, but in the end employer’s should be reimbursed 100% for the paid leave requirement under the new COVID 19 legislation.

EXAMPLE ONLY: The employer issues payroll April 7, which includes pay for time worked, as well as leave under COVID 19 relief act (passed early last week), with total payroll gross pay as $6704.23 and the net pay to employees is $5,278.29, meaning that $1,425.94 was withheld from employees wages --- $1172.05 federal and $253.89 State.

The employer’s payroll tax associated with that payroll issuance is $547.54 --- $522.33 federal and $25.21 State.

For simplicity sakes, let’s say 50% of that payroll is for actual time worked, and 50% is for paid leave under the new act.

The employer’s total cost to issue this payroll is the gross pay of $6,704.23 plus the employer payroll tax of $547.54.

Therefore, at 50% of the total payroll, the cost to the employer for paid leave under the new COVID 19 legislation is $3,625.88.

Under circumstances prior to the new paid leave, the employer would normally remit to the Feds the $1172.05 and the $522.33 – a total of $1,694.38.

Instead, the employer will get a federal credit for the $1,694.38 and would not remit any funds to the federal government. This amount would never become due.

The employer still needs to pay in the State tax of $279.10 [$253.89 plus $25.21]. Some States are allowing a delay of this remittance.

In this hypothetical example, the employer’s cost for paid leave is $3,625.88 less the credit of $1,694.38. The employer is $1,931.50 short on the federal side.

In addition, the employer still needs to pay in the State tax of $279.10 [$253.89 plus $25.21] at some point, either now or later depending on the state.

Clearly, if 100% of the payroll was for paid leave under the new legislation, the employer would be short substantially more - $5,320.26 plus State payroll tax.

The employer will be able to apply for a quick refund of that cost (in less than 2 weeks the IRS said). We don’t have that procedure yet.

Other assistance is available in the form of loans from the federal government, per legislation today, March 25, that is expected to pass the Senate and House. The availability of these funds is going to be key in order for small business to be able to afford to do this.

Finally, there is an exemption for employers under 50 employees if this becomes a hardship that would put the company out of business. Again, guidelines on that at this time are sketchy.

We will continue to advise as more information is made available.

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