President Signs Families First Coronavirus Response Act; Senate Passes $2 Trillion CARES Act

(Parker Tax Publishing March 27, 2020)

Last week, President Trump signed into law H.R. 6201, Families First Coronavirus Response Act (Families First Act), which responds to the coronavirus outbreak by providing paid sick leave and free coronavirus testing, expanding food assistance and unemployment benefits, and requiring employers to provide additional protections for health care workers. The law also provides four types of tax credits that are available to employers and self-employed individuals. The Families First Act is expected to be supplemented and dwarfed by the CARES Act, a $2 trillion economic relief package which has passed the Senate and is widely expected to pass the House and be signed into law by the President. Pub. L. 116-127; H.R. 748.

Practice Aid: For a CLIENT LETTER explaining the Families First Act's key provisions and providing a brief summary of the CARES Act's tax relief measures, CLICK HERE .

Update: The CARES Act passed the Senate unanimously late Wednesday evening and is expected to pass the House and be signed into law by the President, most likely on Friday. Watch this space for a detailed report on its extensive tax provisions. For a brief summary of those provisions, see the final section of this article.

The latest update on the Cares Act published on April 1, 2020. Please CLICK HERE

Background

On March 16, the House of Representatives passed H.R. 6201, Families First Coronavirus Response Act. The Senate quickly passed the measure on March 18, after rejecting attempts by some senators to amend certain provisions. President Trump signed H.R. 6201 into law (Pub. L. 116-127) later that night. As discussed below, Pub. L. 116-127 enacts the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act, in addition to the following new tax credits:

(1) a payroll tax credit for required paid sick leave;

(2) a credit for sick leave for certain self-employed individuals;

(3) a payroll credit for required paid family leave; and

(4) a credit for family leave for certain self-employed individuals.

There is also a special rule (discussed below) which provides that no federal employment taxes will be collected on wages or compensation required to be paid under either the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act.

Additional bills dealing with the economic and unemployment fallout of the Coronavirus Disease 2019 (COVID-19) pandemic are winding their way through Congress at press time.

Employment Taxes

Federal employment taxes are imposed on wages paid to employees with respect to employment and include taxes imposed under the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and federal income tax. In addition, Tier 1 of the Railroad Retirement Tax Act (RRTA) imposes a tax on compensation paid to railroad employees and representatives.

FICA taxes are comprised of two components: the Old-Age, Survivors, and Disability Insurance (OASDI) and Hospital Insurance (Medicare). With respect to OASDI taxes, the applicable rate is 12.4 percent with half of such rate (6.2 percent) imposed on the employee and the remainder (6.2 percent) imposed on the employer. The tax is assessed on covered wages up to the OASDI wage base ($137,700 in 2020).

The employee portion of OASDI taxes must be withheld and remitted to the federal government by the employer during the quarter, as required by the applicable deposit rules. The employer is liable for the employee portion of OASDI taxes, in addition to its own share, whether or not the employer withholds the amount from the employee's wages. OASDI and Medicare taxes are generally allocated by statute among separate trust funds: the OASDI Trust Funds, Medicare's Hospital Insurance Trust Fund, and Supplementary Medical Insurance Trust Fund.

Generally, the term "wages" for OASDI tax purposes means all remuneration for "employment," including the cash value of all remuneration (including benefits) paid in any medium other than cash, with certain exceptions. The name given to the remuneration for employment is immaterial. OASDI wages includes salaries, vacation allowances, bonuses, deferred compensation, commissions, and fringe benefits. The term "employment" is generally defined for FICA tax purposes as any service, of whatever nature, performed by an employee for the person employing him or her, with certain specific exceptions.

The taxes related to the OASDI program collected from FICA and under the Self-Employment Contributions Act (SECA) are deposited into two separate OASDI Trust Funds: (1) the Old-Age and Survivors Insurance (OASI) Trust Fund which pays retirement and survivor benefits, and (2) the Disability Insurance (DI) Trust Fund which pays disability benefits. The major source of income to the OASDI Trust Funds is employment taxes, specifically FICA and SECA. The OASDI Trust Funds are financial accounts in the U.S. Treasury. The only purposes for which these trust funds can be used are to pay benefits and program administrative costs. A fixed proportion (dependent on the allocation of tax rates by trust fund) of the taxes received under FICA and SECA is deposited in the OASI Trust Fund to the extent that such taxes are not needed immediately to pay expenses. Taxes are deposited in the fund on every business day.

SECA imposes tax on the self-employment income of an individual. SECA taxes consist of OASDI tax and Medicare tax. Under the OASDI component, the rate of tax is 12.4 percent on self-employment income up to the OASDI wage base ($137,700 for 2020). Under the basic Medicare tax component, the second rate of tax is 2.9 percent of all self-employment income (without regard to the OASDI wage base). As is the case with employees, an additional Medicare tax applies to the Medicare portion of SECA tax on self-employment income in excess of a threshold amount.

Self-employment income subject to SECA tax is determined as the net earnings from self-employment derived by an individual during any tax year, subject to certain exceptions.

Emergency Paid Sick Leave Act

The new payroll tax credits available under Pub. L. 116-127 are a result of the Emergency Paid Sick Leave Act (EPSLA), which is also part of the new law. The EPSLA requires certain employers to provide an employee with paid sick time to the extent that the employee is unable to work or telework due to a need for leave because:

(1) the employee is subject to a federal, state, or local quarantine or isolation order related to COVID-19;

(2) the employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;

(3) the employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;

(4) the employee is caring for an individual who is subject to an order described in clause (1) or has been advised as described in clause (2);

(5) the employee is caring for the employee's son or daughter if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable due to COVID-19 precautions; or

(6) the employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

Emergency Family and Medical Leave Expansion Act

Pub. L. 116-127 also enacted the Emergency Family and Medical Leave Expansion Act (EFMLEA), which requires that certain employers provide public health emergency leave to employees under the Family and Medical Leave Act of 1993 (FMLA). This requirement generally applies when an employee is unable to work or telework due to a need for leave to care for a son or daughter under age 18 because the school or place of care has been closed, or the child care provider is unavailable, due to a public health emergency. A public health emergency is defined as an emergency with respect to COVID-19 declared by a federal, state, or local authority. An employer that is required to provide this additional family and medical leave is allowed a tax credit in respect of the leave. The first 10 days of public health emergency leave required under the EFMLEA may consist of unpaid leave, after which paid leave is required. The paid leave is for the duration of the period provided in the EFMLEA, which is a maximum of 10 weeks. The amount of required paid leave under the provision is based on an amount not less than two-thirds of an employee's regular rate of pay, and the number of hours the employee would otherwise be normally scheduled to work. Additional guidance is provided for employees with varying schedules. The paid leave mandated by the EFMLEA may not exceed $200 per day and $10,000 in the aggregate.

Payroll Credit for Required Paid Sick Leave

Under Pub. L. 116-127, Section 7001, an employer can take a credit against the OASDI tax or RRTA tax imposed on the employer for each calendar quarter in an amount equal to 100 percent of the qualified sick leave wages paid by the employer with respect to that calendar quarter, subject to the limits described below. The provision defines qualified sick leave wages as wages and compensation paid by an employer which are required to be paid by reason of the EPSLA. The credit may be increased by certain health plan expenses of the employer.

The qualified sick leave wages that are taken into account with respect to an individual for purposes of the credit are limited. There are different limitations for different circumstances under which qualified sick leave wages are paid. In the case of paid sick time qualifying under situations (1), (2), or (3) of the EPSLA, the amount of qualified sick leave wages taken into account for purposes of the credit may not exceed $511 for any day (or any portion thereof) for which the individual is paid such sick time. In the case of paid sick time qualifying under situations (4), (5), or (6) above, the amount of qualified sick leave wages taken into account may not exceed $200 for any day (or portion thereof) for which the individual is paid such sick time. In addition, the provision provides that the aggregate number of days taken into account for the calendar quarter with respect to an individual under all clauses may not exceed the excess (if any) of 10 over the aggregate number of days so taken into account for all preceding calendar quarters.

The credit allowed is increased under the provision by so much of the employer's qualified health plan expenses as are properly allocable to the qualified sick leave wages for which the credit is allowed. Qualified health plan expenses are amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent such amounts are excluded from the employees' income as coverage under an accident or health plan. Qualified health plan expenses are allocated to qualified sick leave wages in such manner as the Treasury Secretary may prescribe. Except as otherwise provided, such allocations are treated as properly made under the provision if made on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate).

The credit allowed may not exceed the OASDI tax or RRTA tax imposed on the employer, reduced by any credits allowed for the employment of qualified veterans and research expenditures of qualified small businesses for that calendar quarter on the wages paid with respect to all the employer's employees. However, if for any calendar quarter the amount of the credit exceeds the OASDI tax or RRTA tax imposed on the employer, reduced as described in the prior sentence, such excess is treated as a refundable overpayment.

If an employer claims a credit under this provision, the amount so claimed is included in gross income. Thus, the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified sick leave wages, or deduction for health plan expenses (or any amount capitalizable to basis).

Example: Employer A claims a credit of $5,510 for $5,110 of qualified sick leave wages and $400 of health plan expenses paid during the quarter. Employer A has an offsetting income inclusion amount of $5,510, and may deduct $5,110 of qualified sick leave wages and $400 of health plan expenses (assuming such costs are not subject to capitalization). In addition, Employer A's income tax deduction for any tax imposed for the employer's share of OASDI or RRTA tax for such quarter is not reduced.

Practice Tip: With respect to the credit allowed under Code Sec. 45S for certain paid family and medical leave, any qualified sick leave wages taken into account under the rules in Pub. L. 116-127, Section 7001, are not taken into account for purposes of determining the Code Sec. 45S credit. Thus, an employer cannot claim a credit under Code Sec. 45S with respect to the qualified sick leave wages paid, but may be able to take a credit under Code Sec. 45S with respect to any additional wages paid, provided the requirements of Code Sec. 45S are met with respect to the additional wages.

An employer may elect to have the payroll tax credit provision not apply for a calendar quarter. Further, the credit does not apply to the U.S. Government, the government of any State or political subdivision thereof, or any agency or instrumentality of any of those entities. Employers in the U.S. territories may claim the credit by filing their quarterly federal employment tax returns.

Credit for Sick Leave for Certain Self-Employed Individuals

Under Pub. L. 116-127, Section 7002, An eligible self-employed individual may take an income tax credit for any tax year for a qualified sick leave equivalent amount. An eligible self-employed individual is defined as an individual who regularly carries on any trade or business and would be entitled to receive paid leave during the tax year under the EPSLA, if the individual were an employee of an employer (other than himself or herself) that is subject to the requirements of the EPSLA.

The qualified sick leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days during the tax year that the self-employed individual cannot perform services for which that individual would have been entitled to sick leave pursuant to the EPSLA (if the individual were employed by an employer), multiplied by the lesser of two amounts: (a) $511 in the case of paid sick time described in clauses (1), (2), or (3) of the EPSLA ($200 in the case of paid sick time described in clauses (4), (5), or (6) of the EPSLA); or (b) 100 percent of the average daily self-employment income of the individual for the tax year in the case of any day of paid sick time described in clauses (1), (2), or (3) of the EPSLA (67 percent in the case of paid sick time described in clauses (4), (5), or (6) of the EPSLA).

The number of days taken into account in determining the qualified sick leave equivalent amount may not exceed, with respect to any tax year, 10 days, taking into account any days taken in all preceding tax years. The individual's average daily self-employment income under the provision is an amount equal to the net earnings from self-employment for the taxable year divided by 260.

In addition, provided the taxpayer has appropriate documentation, the credit is refundable.

If an eligible self-employed individual receives qualified sick leave wages, the individual's qualified sick leave equivalent amount determined under the provision is reduced (but not below zero) to the extent that the sum of the qualified sick leave equivalent amount and the qualified sick leave wages received exceeds $2,000 ($5,110 in the case of any day any portion of which is paid sick time described in clause (1), (2), or (3) of the EPSLA).

Example: Becky is an eligible self-employed individual and her qualified sick leave equivalent amount is $1,500, but she also works for a covered employer under the EPSLA and received qualified sick leave wages under clause (5) of the EPSLA of $1,000 to care for her daughter while school was closed due to COVID-19. Becky's qualified sick leave equivalent amount is reduced by $500, resulting in a credit of $1,000.

Payroll Credit for Required Paid Family Leave

Under Pub. L. 117-126, Section 7003, an employer is allowed a credit against the OASDI tax or RRTA tax imposed on the employer for each calendar quarter in an amount equal to 100 percent of the qualified family leave wages paid by the employer with respect to that calendar quarter, subject to certain limits. Qualified family leave wages are defined as wages (within the meaning of Code Sec. 3121(a)) and compensation (within the meaning of Code Sec. 3231(e)) paid by an employer by reason of the EFMLEA. The credit may be increased by certain health plan expenses of the employer.

The maximum amount of qualified family leave wages eligible for the credit is $200 for any day (or portion thereof) for which the employee is paid qualified family leave wages, and in the aggregate with respect to all calendar quarters, $10,000. The credit is not allowed in respect of unpaid leave.

The credit allowed is increased by so much of the employer's qualified health plan expenses as are properly allocable to the qualified family leave wages for which the credit is allowed. The provision defines qualified health plan expenses as amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent such amounts are excluded from the employees' income as coverage under an accident or health plan. Qualified health plan expenses are allocated to qualified family leave wages in such manner as the Secretary of the Treasury (or the Secretary's delegate) may prescribe. Except as otherwise provided by the Secretary, such allocations are treated as properly made under the provision if made on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate).

The credit allowed may not exceed the OASDI tax or RRTA tax imposed on the employer, reduced by any credits allowed for the employment of qualified veterans and research expenditures of qualified small businesses for that calendar quarter on the wages paid with respect to all of the employer's employees. However, if for any calendar quarter the amount of the credit exceeds the OASDI tax or RRTA tax imposed on the employer, reduced as described under the prior sentence, such excess is treated as a refundable overpayment.

If an employer claims a credit under this provision, the amount claimed is included in gross income. Thus, the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified family leave wages, or deduction for health plan expenses (or any amount capitalizable to basis).

Example: Employer ABC claims a credit of $2,700 for $2,500 of qualified family leave wages and $200 of health plan expenses paid during the quarter. ABC will have an offsetting income inclusion amount of $2,700 and may deduct $2,500 of qualified family leave wages and $200 of health plan expenses (assuming such costs are not subject to capitalization). In addition, ABC's income tax deduction for any tax imposed by Code Sec. 3111(a) or Code Sec. 3221(a) for such quarter is not reduced.

Any wages taken into account in determining the credit for required paid family leave are not taken into account for purposes of determining the Code Sec. 45S credit. Thus, the employer may not claim a credit under Code Sec. 45S with respect to the qualified family leave wages paid, but may be able to take a credit under Code Sec. 45S with respect to any additional wages paid, provided the requirements of Code Sec. 45S are met with respect to the additional wages.

Credit for Family Leave for Certain Self-Employed Individuals

Under Pub. L. 116-127, Section 7004, an eligible self-employed individual is entitled to an income tax credit for any tax year for a qualified family leave equivalent amount, as described below. An eligible self-employed individual is defined as an individual who regularly carries on any trade or business and would be entitled to receive paid leave during the tax year under the EFMLEA, if the individual were an employee of an employer (other than himself or herself) that is subject to the requirements of the EFMLEA.

An employer that is required to provide this additional family and medical leave is allowed a tax credit in respect of the leave. In general, under the provision, a self-employed individual is allowed a similar tax credit in situations in which a credit would be allowed if the individual were an employee of an employer subject to the leave requirements.

The first 10 days of public health emergency leave required under the EFMLEA may consist of unpaid leave, after which paid leave is required. The paid leave is for the duration of the period provided in the EFMLEA, which is a maximum of 10 weeks. The amount of required paid leave under the provision is based on an amount not less than two-thirds of an employee's regular rate of pay, and the number of hours the employee would otherwise be normally scheduled to work. Additional guidance is provided for employees with varying schedules. The paid leave mandated by the EFMLEA may not exceed $200 per day and $10,000 in the aggregate.

The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50) during the tax year that the self-employed individual cannot perform services for which that individual would be entitled to paid leave pursuant to the EFMLEA (if the individual were employed by an employer), multiplied by the lesser of two amounts: (1) 67 percent of the average daily self-employment income of the individual for the tax year, or (2) $200. The individual's average daily self-employment income under the provision is an amount equal to the individual's net earnings from self-employment for the year divided by 260. The provision provides that the credit allowed is refundable.

If an eligible self-employed individual receives qualified family leave wages, the individual's qualified family leave equivalent amount determined under the provision is reduced (but not below zero) to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages received exceeds $10,000.

Example: Bob is an eligible self-employed individual and his qualified family leave equivalent amount is $5,000, but he also works for an employer that is a covered employer under EFMLEA and received qualified family leave wages of $9,000 to care for his daughter while school was closed due to COVID-19. Bob's qualified family leave equivalent amount is reduced by $4,000, resulting in a credit of $1,000.

Special Rule Related to Tax on Employers

Pub. L. 116-127, Section 7705, provides that any wages or compensation required to be paid to employees by reason of the EFMLEA and the EPSLA are not considered wages of the employer for purposes of FICA tax or compensation for purposes of RRTA tax. As a result, no federal employment taxes will be collected on such amounts from employers or employees to be contributed to the OASDI or railroad retirement programs.

Effective Date

Pub. L. 116-127, Section 5108 provides, somewhat vaguely, that This Act, and the requirements under this Act, shall take effect not later than 15 days after the date of enactment of this Act [March 18, 2020]. Consequently, the exact effective dates for the payroll tax credits and the special rule related to the collection of employment taxes may require IRS clarification. Pub. L. 116-127, Section 5109 is clearer with respect to the expiration date, stating, This Act, and the requirements under this Act, shall expire on December 31, 2020.

Up Next in the Legislative Pipeline: The CARES Act

The CARES Act is a $2 trillion economic relief package that passed the Senate unanimously on March 25. The massive bill, which includes numerous tax measures, is widely expected to pass the House and be signed into law by the President. A brief summary of its tax provisions follows.

For individual taxpayers, the CARES Act

(1) Provides 2020 recovery rebates of up to $1,200 for singles and $2,400 for joint filers which begin phasing out at adjusted gross income of $75,000 and $150,000 respectively. Taxpayers with children will receive an additional $500 per child. Rebates will be issued based on 2019 income tax returns, or 2018 returns for individuals who haven't yet filed in 2019.

(2) Waives the 10% early withdrawal penalty for coronavirus-related distributions from retirement plans and provides the option of recontributing the funds for up to three years after such distributions are made.

(3) Temporarily waives the required minimum distribution rules for 2020 for defined contribution plans, including an eligible deferred compensation plan, and individual retirement plans.

(4) Allows an above the line deduction of up to $300 for charitable contributions and relaxes the limitations on deductible charitable contributions for taxpayers who itemize.

(5) Modifies the limitations on individual and corporate charitable contributions made during 2020 and increases the limit on contributions of food inventory.

(6) Excludes from income certain student loan debt repaid by an individual's employer for repayments made after date of enactment and before 2021.

For business taxpayers, the CARES Act

(1) Provides an employee retention credit against applicable employment taxes of 50% of wages for employers subject to closure due to COVID-19.

(2) Extends the time for paying employer payroll taxes.

(3) Temporarily repeals the taxable income limitation for net operating losses and allows a five-year carryback for losses incurred after 2017 and before 2021.

(4) Eliminates the limitation on excess farm losses for years after 2017 and before 2026.

(5) Modifies the credit for prior year minimum tax liability of corporations by reducing the limitation on the amount of the credit that is refundable.

(6) Modifies the limitation on deductions for business interest by increasing the amount of taxable income which limits the deduction from 30% to 50%.

(7) Fixes the technical glitch in the Tax Cuts and Jobs Act which prevented qualified improvement property from qualifying as 15-year depreciation property and bonus depreciation property.

(8) Provides a temporary exception from excise tax for alcohol used to produce hand sanitizer.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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