By Andrew Gradman, Tax Attorney
Trusted Advisor at AB FinWright LLP (www.abfinwright.com) and Founder at Gradman Tax (www.gradmantax.com)

Accepted for publication in the CEB Business Law Reporter; reprinted with permission. Updated through April 24, 2020. The published version will reflect new developments and may contain proofreading and other changes. 

This article is the second of a four-part series which describes three tax subsidies which are meant to help keep employees employed during the coronavirus pandemic:

  1. Long-term deferral of the employer’s obligation to pay certain payroll taxes;
  2. A limited daily stipend for a limited number of days, to cover part of the newly-mandated paid sick or family leave (with a similar subsidy for the self-employed); and
  3. Up to $5,000 in dollar-for-dollar matching pay, for economically impacted employers.

These provisions appear in the Families First Coronavirus Response (“Families First”) Act (Pub Law 116-127, 134 Stat 178) and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (Pub Law 116-136 134 Stat 281).

2. Credits for Newly-Mandated Sick or Family Leave

A. Background: New Obligations to Provide Paid Leave 
In the Families First Act, Congress created two new types of mandatory paid leave. The (non-tax) details are beyond the scope of this article. For more information, visit the Department of Labor website at https://www.dol.gov/agencies/whd/pandemic. In brief, an employee is eligible for:

Paid Sick Leave: Up to two weeks (80 hours) at his regular rate of pay where he cannot work because he is quarantined and/or experiencing COVID-19 symptoms and seeking a medical diagnosis; or up to two weeks (80 hours) at two-thirds his regular rate of pay because he is unable to work because of a bona fide need to care for an individual subject to quarantine, or to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19.

Expanded Family and Medical Leave: Up to an additional 10 weeks at two-thirds his regular rate of pay where an employee, who has been employed for at least 30 calendar days, is unable to work due to a bona fide need for leave to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19.

These mandatory payments can get expensive. In addition, the payments incur Medicare taxes (3.8%). To ease this burden, the federal government will reimburse the employer for all or most of the direct economic costs of these new types of leave, including the additional Medicare taxes, via the tax credits described below. From a tax perspective, it is as though the federal government is paying the credited amounts directly to the employee.

B. Credit for Paid Sick Leave 

The government will pay 100% of an employer’s Paid Sick Leave expenses, plus allocable health plan expenses and Medicare taxes, subject to these limits:

  • Start and Stop dates: The credit only applies to days between April 1, 2020 and December 31, 2020.
  • Daily cap: The credit only applies to the first $200 or $511 of Paid Sick Leave expenses per day (depending whether the employee’s sick leave qualifies for full pay, or two-thirds pay, as described above).
  • Lifetime cap: The credit is available for up to ten sick leave days total (out of the mandated two weeks).

A similar subsidy is available for self-employed persons with these modifications:

  • Credit Amount: Instead of basing the credit amount on actual wages paid, we take the person’s net earnings from self-employment for the entire year, and apportion this over the days he is sick (assuming a 260-day work year).
  • Additional daily cap: For sick days which would earn two-thirds wages for employees, the tax credit will cover no more than two-thirds of an average day’s pay.

C. Credit for Paid Expanded Family and Medical Leave 

The government will pay 100% of an employer’s Expanded Family and Medical Leave expenses, plus associated health plan expenses. A similar subsidy is available for self-employed persons, again defined in terms of average daily earnings. For both credits, these limits apply:

  • Start and Stop dates: Same as above.
  • Daily cap: The credit only applies to the first $200 of Expanded Family and Medical Leave expenses per day.
  • Lifetime cap: The credit is available for up to $10,000 (per employee) or 50 days (for the self-employed).

See our subsequent for articles for parts (3) through (4).