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How to Substantiate Eligibility for, Claim Tax Credits for Paid Leave

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The Families First Coronavirus Response Act (the “FFCRA”), signed by President Trump on March 18, 2020, provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.

The FFCRA gives businesses with fewer than 500 employees funds to provide employees with paid sick and family and medical leave for reasons related to COVID-19, either for the employee’s own health needs or to care for family members. Workers may receive up to 80 hours of paid sick leave for their own health needs or to care for others and up to an additional ten weeks of paid family leave to care for a child whose school or place of care is closed or child care provider is closed or unavailable due to COVID-19 precautions.

The FFCRA covers the costs of this paid leave by providing small businesses with refundable tax credits. Certain self-employed individuals in similar circumstances are entitled to similar credits.

The tax credits for paid leave apply to wages paid with respect to the period of April 1, 2020, through December 31, 2020. While the wages can only be for periods of leave between April 1, 2020, and December 31, 2020, a payment of qualified leave wages that is made after the end of this period may nonetheless be eligible for the credits if the wages are for leave that an employee took between April 1, 2020, and December 31, 2020.

Ericksen Krentel professionals are available to help you. For tax credit and other tax-related matters, contact Kevin Neyrey at kneyrey@ericksenkrentel.com or Kenny Eldridge at keldridge@ericksenkrentel.com.

In this article, Ericksen Krentel has summarized how employers should substantiate eligibility for and how to claim the tax credits for paid leave wages, but a full list of FFCRA frequently asked questions regarding COVID-19 tax credits for required paid leave provided by small and midsize businesses can be found on the IRS website by clicking here

You can click on any provision in the list below to go directly to that summary (direct link feature may not work on mobile devices):

How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?

How to Claim the Credits


HOW SHOULD AN EMPLOYER SUBSTANTIATE ELIGIBILITY FOR TAX CREDITS FOR QUALIFIED LEAVE WAGES?


What information should an employer receive from an employee and maintain to substantiate eligibility for the sick leave or family leave credits?

An employer will substantiate eligibility for the sick leave or family leave credits if the employer receives a written request for such leave from the employee in which the employee provides:

  • The employee’s name;
  • The date or dates for which leave is requested;
  • A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason; and
  • A statement that the employee is unable to work, including by means of telework, for such reason.

In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.

In the case of a leave request based on a school closing or child care provider unavailability, the employee’s statement should include the name and age of the child (or children) to be cared for, the name of the school that has closed or place of care that is unavailable, and a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than 14 during daylight hours, a statement that special circumstances exist requiring the employee to provide care.
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What additional records should an employer maintain to substantiate eligibility for the sick leave or family leave credit?

An employer will substantiate eligibility for the sick leave or family leave credits if, in addition to the information set forth above (“What information should an Employer receive from an employee and maintain to substantiate eligibility for the sick leave or family leave credits?”), the employer creates and maintains records that include the following information:

  • Documentation to show how the employer determined the amount of qualified sick and family leave wages paid to employees that are eligible for the credit, including records of work, telework and qualified sick leave and qualified family leave.
  • Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages.
  • Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19, the employer submitted to the IRS.
  • Copies of the completed Forms 941, Employer’s Quarterly Federal Tax Return, the employer submitted to the IRS (or, for employers that use third-party payers to meet their employment tax obligations, records of information provided to the third party payer regarding the employer’s entitlement to the credit claimed on Form 941).

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How long should an employer maintain records to substantiate eligibility for the sick leave or family leave credit?

An employer should keep all records of employment taxes for at least four years after the date the tax becomes due or is paid, whichever comes later. These should be available for IRS review.
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HOW TO CLAIM THE CREDITS


How does an employer claim the refundable tax credits for paid leave wages (plus any allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax)?

Employers will report their total qualified leave wages and the related credits for each quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax.

In anticipation of receiving the credits, employer can fund qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) by accessing federal employment taxes, including withheld taxes, required to be deposited with the IRS or by requesting an advance from the IRS.
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Can an employer required to pay qualified leave wages fund these payments before receiving the credits by reducing its federal employment tax deposits?

An employer may fund the qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) by accessing federal employment taxes, including those the employer already withheld, that are set aside for deposit with the IRS, for other wage payments made during the same quarter as the qualified leave wages.

That is, an employer that pays qualified leave wages to its employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter may reduce the amount of federal employment taxes it deposits for that quarter by the amount of the qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) paid in that calendar quarter. The employer must account for the reduction in deposits on the Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Example: An employer paid $5,000 in qualified sick leave wages and qualified family leave wages (and allocable health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter as the $5,000 in qualified leave wages. The employer may keep up to $5,000 of the $8,000 of taxes employer was going to deposit, and it will not owe a penalty for keeping the $5,000. The employer is then only required to deposit the remaining $3,000 on its required deposit date. The employer will later account for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.
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Is an employer that reduces its federal employment tax deposits to fund qualified leave wages that it has paid subject to penalty for failing to deposit federal employment taxes?

No, provided the employer does not claim an advance for the same portion of the anticipated credits it relied upon to reduce its deposits. That is, without being subject to a penalty for failing to deposit federal employment taxes, an employer that has paid qualified leave wages to its employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS may reduce the amount of the federal employment tax deposit by the amount of the qualified leave wages (and allocable qualified health plan expenses plus the employer’s share of Medicare tax on the qualified leave wages) paid by the employer in that calendar quarter, as long as the employer does not also seek an advance credit for the same amount.

The total amount of any reduction in any required deposit may not exceed the total amount of qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) in the calendar quarter, minus any amount of qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) that had been previously used to:

  • reduce a prior required deposit in the calendar quarter and obtain the relief; or
  • seek payment of an advance credit.

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How can an employer required to pay qualified leave wages fund the payment of these wages if the employer does not have sufficient federal employment taxes set aside for deposit to cover those payments? Can the employer get an advance of the tax credits for paid leave?

Yes. Because quarterly returns are not filed until after qualified leave wages are required to be paid, some employers may not have sufficient federal employment taxes set aside for deposit to the IRS to fund their required qualified leave wages. The IRS has a procedure for obtaining an advance of the refundable credits.

The employer should first reduce its remaining federal employment tax deposits for wages paid in the same quarter to zero. If the permitted reduction in deposits does not equal the qualified leave wages (and allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages), the employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance credit for the remaining qualified leave wages (and any allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) it has paid for the quarter for which it did not have sufficient federal employment tax deposits.

If an employer fully reduces its required deposits of federal employment taxes otherwise due on wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and it has not paid qualified leave wages (and any allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) in excess of this amount, it should not file the Form 7200. If it files the Form 7200, it will need to reconcile this advance credit and its deposits with the qualified leave wages on Form 941 (or other applicable federal employment tax return such as Form 944 or Form CT-1), and it may have an underpayment of federal employment taxes for the quarter.

Example: An employer paid $10,000 in qualified leave wages (and allocable qualified health plan expenses and the Employer’s share of Medicare tax on the qualified leave wages) and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same quarter. The employer can keep the entire $8,000 of taxes the employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on the Form 941. The employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.
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If the qualified leave wages (and any allocable qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages) exceed the employer’s share of social security tax owed for a quarter, how does the employer get a refund of the excess credits? Does this affect what the employer puts on its Form 941?

The amount of qualified leave wages (and any allocable qualified health plan expenses and the employer’s share of the Medicare tax on the qualified leave wages) in excess of the social security tax the employer owes for the quarter is refundable. If the amount of the credits exceeds the employer portion of social security tax, then the excess is treated as an overpayment and refunded to the employer.

Consistent with its treatment as an overpayment, the excess will be applied to offset any remaining tax liability on the Form 941, Employer’s Quarterly Federal Tax Return, and the amount of any remaining excess will be reflected as an overpayment on the Form 941. Like other overpayments of federal taxes, the overpayment will be subject to offset under section 6402(a) of the Code prior to being refunded to the employer.
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How does an employer obtain Form 7200, and where should it send its completed form to receive the advance credit?

Contact your Ericksen Krentel professional for assistance.
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What if an employer does not initially pay an employee qualified leave wages when the employee is entitled to those wages, but pays those wages at a later date?

An employer can claim the credits once it has paid the employee for the period of paid sick leave or expanded family and medical leave, as long as the qualified leave wages relate to leave taken during the period beginning on April 1, 2020, and ending December 31, 2020.
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As requirements and guidance change, Ericksen Krentel professionals are available to help you. As questions or concerns arise, we ask that you contact us so we can address them as quickly as possible to ensure we continue to meet your needs. As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or monitoring our accounts on LinkedIn, Twitter or Facebook.

About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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