IRS Issues Guidance on Reporting Qualified Leave Wages Paid Under Families First Act

(Parker Tax Publishing July 2020)

The IRS issued guidance to employers on the requirement to report the amount of qualified sick leave wages and qualified family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act). The guidance requires employers to report these amounts either on Form W-2, Box 14, or on a separate statement, and is intended to provide employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act. Notice 2020-54.

Background

The Families First Coronavirus Response Act (Families First Act) (Pub. L. 116-127) generally requires employers with fewer than 500 employees to provide paid leave due to certain circumstances related to the Coronavirus Disease 2019 (COVID-19) through two separate provisions: the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act.

Section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA) requires certain employers to provide employees with up to 80 hours of paid sick leave if the employee is unable to work or telework because the employee:

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

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

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

(4) is caring for an individual who is subject to a quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;

(5) is caring for a son or daughter of such employee 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) is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor.

An employee who is unable to work or telework for reasons related to COVID-19 described in (1), (2) or (3), above, is entitled to paid sick leave at the employee's regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $511 per day and $5,110 in the aggregate. An employee who is unable to work or telework for reasons related to COVID-19 described in (4), (5), or (6), above, is entitled to paid sick leave at two-thirds the employee's regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $2,000 in the aggregate.

The Emergency Family and Medical Leave Expansion Act (EFMLEA), amends the Family and Medical Leave Act of 1993 to require employers to provide expanded paid family and medical leave to employees who are unable to work or telework for reasons related to COVID-19. An employee can receive up to 10 weeks of paid family and medical leave at two-thirds the employee's regular rate of pay, up to $200 per day and $10,000 in the aggregate if the employee is unable to work or telework because the employee is caring for a son or daughter whose school or place of care is closed or whose child care provider is unavailable for reasons related to COVID-19.

Sections 7001 and 7003 of the Families First Act generally provide that employers subject to the paid leave requirements under EPSLA and EFMLEA ("eligible employers") are entitled to fully refundable tax credits to cover the cost of the leave required to be paid for those periods during which employees are unable to work or telework for reasons related to COVID-19.

Eligible employers are entitled to receive a refundable credit equal to the amount of the qualified sick leave wages and qualified family leave wages (collectively "qualified leave wages"), plus allocable qualified health plan expenses. The credit is allowed against the taxes imposed on employers by Code Sec. 3111(a) (social security tax), first reduced by any credits claimed under Code Sec. 3111(e) and (f), and Code Sec. 3221(a) (the Railroad Retirement Tax Act Tier 1 tax), on all wages and compensation paid to all employees. Under Section 7005 of the Families First Act, the qualified leave wages are not subject to the taxes imposed on employers by Code Sec. 3111(a) and Code Sec. 3221(a). In addition, Section 7005 provides that the credits under Sections 7001 and 7003 of the Families First Act are increased by the amount of the tax imposed by Code Sec. 3111(b) (employer's share of Medicare tax) on qualified leave wages.

Specifically, eligible employers with a refundable tax credit for qualified sick leave wages paid to an employee not to exceed $200 (or $511 in the case of any day any portion of which the employee is paid sick time described in EPSLA Section 5102(a)(1), (2), or (3)) for any day (or portion thereof), and the maximum number of days that may be taken into account per employee is 10 days. Section 7003(b) of the Families First Act provides eligible employers with a refundable tax credit for qualified family leave wages paid to an employee not to exceed $200 per day, and the aggregate credit may not exceed $10,000 per employee. Up to 10 weeks of qualifying family leave wages can be taken into account for the credit.

Sections 7002(a) and 7004(a) of the Families First Act entitle a self-employed individual to a refundable credit against income tax imposed on self-employment income for qualified sick leave equivalent amounts and qualified family leave equivalent amounts. The credit is available to self-employed individuals carrying on any trade or business within the meaning of Code Sec. 1402 if the self-employed individual would be entitled to receive paid leave under the EPSLA or the EFMLEA if the individual were an employee of an employer (other than himself or herself).

The refundable credits authorized under the Families First Act apply to qualified sick leave wages and qualified family leave wages paid with respect to the period beginning on April 1, 2020, and ending on December 31, 2020. The same period is used to determine the refundable credits for qualified sick leave equivalent amounts and qualified family leave equivalent amounts for self-employed individuals.

If a self-employed individual is entitled to a refundable credit for a qualified sick leave equivalent amount and also receives qualified sick leave wages as an employee, the qualified sick leave equivalent amount for which the self-employed individual may claim a tax credit is reduced to the extent that the sum of the qualified sick leave equivalent amount and any qualified sick leave wages exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described EPSLA Section 5102(a)(1), (2), or (3)). Similarly, if a self-employed individual is entitled to a refundable credit for a qualified family leave equivalent amount and also receives qualified family leave wages as an employee, the qualified family leave equivalent amount for which the self-employed individual may claim a tax credit is reduced to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages exceeds $10,000.

Notice 2020-54

In order to provide self-employed individuals who also receive wages or compensation as employees with the information they need to properly claim any qualified sick leave equivalent or qualified family leave equivalent credits for which they are eligible, the IRS issued Notice 2020-54 which requires employers to report to employees the amount of qualified sick leave wages and qualified family leave wages paid to the employees under Sections 7001 or 7003 of the Families First Act, respectively.

Under Notice 2020-54, employers must separately state the total amount of qualified sick leave wages paid under EPSLA Section 5102(a)(1), (2), or (3), qualified sick leave wages paid under EPSLA Section 5102(a)(4), (5), and (6), and qualified family leave wages paid under EFMLEA Section 3102(b). Employers must separately state each of these wage amounts either on Form W-2, Box 14 or on a separate statement. Self-employed individuals claiming qualified sick leave equivalent or qualified family leave equivalent credits must then report these qualified sick leave and qualified family leave wage amounts on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax returns, and reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages.

Reporting Qualified Sick Leave Wages

In addition to including qualified sick leave wages in the amount of wages paid to the employee reported in Boxes 1, 3 (up to the social security wage base), and 5 of Form W-2 (or, in the case of compensation subject to the RRTA, in the amount of RRTA compensation paid to the employee reported in Boxes 1 and 14 of Form W-25), employers are required to report to the employee the following type and amount of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement:

(1) the total amount of qualified sick leave wages paid for reasons described in EPSLA Section 5102(a)(1), (2), and (3) and, in labeling this amount, the employer must use the following, or similar, language: "sick leave wages subject to the $511 per day limit;" and

(2) the total amount of qualified sick leave wages paid for reasons described EPSLA Section 5102(a)(4), (5), or (6) and, in labeling this amount, the employer must use the following or similar language: "sick leave wages subject to the $200 per day limit."

If a separate statement is provided and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 provided to the employee, and if the employee receives an electronic Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

Reporting Qualified Family Leave Wages

In addition to including qualified family leave wages in the amount of wages paid to the employee reported in Boxes 1, 3 (up to the social security wage base), and 5 of Form W-2 (or, in the case of compensation subject to RRTA, in the amount of RRTA compensation paid to the employee reported in Boxes 1 and 14 of Form W-2), employers are required to separately report to the employee the total amount of qualified family leave wages paid to the employee under the EFMLEA either in Box 14 of Form W-2 or on a separate statement. In labeling this amount, the employer must use the following, or similar, language: "emergency family leave wages." If a separate statement is provided and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 sent to the employee, and if the employee receives an electronic Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

Optional Employee Instructions

As part of the Instructions for Employee, Notice 2020-54 provides that the employer may provide additional information about qualified sick leave wages and qualified family leave wages and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. Notice 2020-54 includes model language (modified as necessary) which may be used by employers to provide such additional information.

For a discussion of the payroll credit for required paid sick leave, see Parker Tax ¶106,410. For a discussion of the credit for sick leave for certain self-employed individuals, see Parker Tax ¶106,420. For a discussion of the payroll tax credit for required paid family leave, see Parker Tax ¶106,430. For a discussion of the credit for family leave for certain self-employed individuals, see Parker Tax ¶106,440.

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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