Employer tax withholding responsibilities under the Families First Coronavirus Response Act
The Families First Coronavirus Response Act (Act) requires certain employers to provide employees who are affected by COVID-19 with paid sick leave or expanded family and medical leave. The Act also provides employers with tax credits for the qualified sick and family leave wages paid. This article attempts to clarify the employer’s responsibility for withholding of taxes for qualified sick and family leave wages paid under the Act.
The Act exempts the employer’s share of Social Security taxes levied under §3111(a) of the Internal Revenue Code (see §7005 of the Act). Qualified sick and family leave wages are still subject to the employee share of Social Security taxes under IRC §3101(a), Medicare taxes under IRC §3111(b), federal income tax withholding under IRC §3402, and state income tax withholding. When employers pay qualified sick and family leave wages to their employees, the requirements to withhold federal and state income taxes, the employees’ share of Social Security taxes, and Medicare taxes from their employees’ paychecks remain the same (see IR-2020-57 released by the IRS and DOL on March 20, 2020).
However, due to the credits provided in the Act, employers that pay qualified sick or family leave wages will be able to retain federal taxes withheld from all employees in amounts equal to qualified sick and family leave wages paid rather than remitting the taxes with their federal payroll tax returns. According to the IRS, the employer may retain the qualifying credit amounts from withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes. The tax credit is increased by the amount of employer Medicare taxes paid on the qualified sick and family leave wages. The IRS has provided the following examples:
If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
Employers will need to check with the appropriate state authorities for any relief from the withholding and payment of state income taxes on qualified sick and family leave wages paid.
The IRS issued Notice 2020-21 providing that the tax credits for qualified sick and family leave wages required to be paid under the Act will apply to wages paid for the period beginning April 1, 2020, and ending December 31, 2020.
Employers’ responsibilities under the Act are confusing. Employers need to take note that their responsibilities for withholding payroll taxes from employee’s wages remain the same. However, prior to remitting taxes withheld, employers should be fully aware of the credits provided under the Act for qualified sick and family leave wages paid which may be applied to the taxes withheld from all employees.