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Tax credits to pay for COVID paid leave requirements


This post is a reminder of your COVID paid leave requirements for retained employees.

I will also explain how you get the tax credit to pay for it, and the problems associated with that.

You can still get this credit if you opt for the Paycheck Protection Plan, but COVID paid leave payroll does not count toward forgiveness of the PPP loan.

Or, it is possible that your best option is the ERC if you qualify – Employment Retention Credit (a credit of up to $5000 per employee) -- and bypass the COVID credit and the PPP.

Credit for COVID Leave Pay:

For COVID leave pay to employees, the employer gets a payroll tax credit to pay for it. (not a deferral, but a credit that reduces the payroll tax and withholding deposit amount permanently)

This COVID pay is required to be paid by the employer for an employee who stays home 100% due to the quarantine. The required pay is 100% of regular pay for 80 hours or for the average “prior to COVID” scheduled work hours over two weeks, whichever is less.

[The alternative to this is termination which allows the employee to get full unemployment benefits (which is designed to achieve a total pay to the employee similar or equal to previously, for up to 4 months at least)]

This COVID leave pay can include an employee who now works less hours than “prior to COVID” who has a child at home due to school or daycare closure, or otherwise must care for someone who is subject to the quarantine (lockdown in general or a family member with the virus, or similar symptoms, that needs care), or is sick themselves. For the COVID leave hours not worked in a pay period [that is, the average over two weeks less actual hours worked], the required pay is 2/3 of regular pay, up to $200 maximum per day, until a total of 80 hours is reached for that employee.

[The alternative to this COVID leave pay is partial unemployment for the employee]

The COVID sick pay requirement to pay retained employees, and the credit itself maxes out for wages paid at 80 hours per employee.

An example: 80 hours @ $20/hr = $1,600.

Health care cost for 2 weeks is $400

The Medicare cost for those 80 hrs is $23 {.0145 X $1600}

The total cost equals $2,023

The CODIV leave tax credit for this one employee is $2,023.

The employer does NOT pay the 6.2% social security tax on such wages or salaries.

Credit for EXPANDED COVID Leave Pay:

Thereafter, for a retained employee who has a child at home due to a school closure or daycare provider unavailable for reasons related to COVID 19, and must be home all or part of the time, the employer is required to pay 2/3 of the regular pay rate up to $200 per day maximum, for an additional 10 weeks of expanded family and medical leave for missed hours of work based on the “prior to COVID” two week average. The credit calculation is the same as above.

Per the DOL: “Employers of Health Care Providers or Emergency Responders may elect to exclude such employees from eligibility…..Certain provisions may not apply to certain employers with fewer than 50 employees. See Department FFCRA regulations (expected April 2020)….. An employee may elect to substitute any accrued vacation leave, personal leave, or medical or sick leave for……partial paid leave.”

Yes, you can take the PPP loan, and still qualify for the two above credits. However, the COVID paid leave payroll DOES NOT count toward payroll costs in the formula for calculating the forgivable portion of the PPP loan. This should not deter a business owner from applying for the PPP loan, then making a determination between taking that loan and the Employee Retention Credit – explained in my next post.

How do you get the COVID leave pay credit:

Per IRS Revenue Procedure 2020-62, the employer can hold back ALL payroll withholdings, including federal income tax, social security and Medicare, and the employer matching payroll tax to give themselves that credit. This is confirmed by the IRS FAQ on the topic.

In real life, we are learning today that payroll processing companies will NOT do this because of potential liability, or for other business reasons (such as ADP that holds and invests for profit your payroll tax funds until the last day they must be remitted to State and Federal agencies). This would seem to force business owners to wait for a refund after filing the Form 941 quarterly report (due in July for Quarter 2). Not so great.

If you process your own payroll on QuickBooks or Intuit Online Payroll, and possibly with other software, or your accountant does, you would be able to retain the withholdings by NOT pushing that payroll tax payment button. Our recommendation is that you make sure you qualify for the credit, inasmuch as holding back employee withholdings might otherwise get you into some trouble.

The employer may receive an ADVANCE payment for this credit from the IRS by submitting Form 7200 if the held back employer tax deposits are not sufficient. I can only assume, but will need to verify, that submission of the form 7200 might also be possible to get funds from the IRS after your payroll processing company insists on sending your employer tax deposit funds to the IRS. If not, you may have to wait for a refund after filing your quarterly payroll report.

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