The Families First Coronavirus Response Act, signed by President Trump on March 18, 2020, creates new tax credits for sick leave and family leave. Employers can take these tax credits against certain payroll taxes of the employer, specifically the employer share of Social Security taxes and of Tier 1 Railroad Retirement Tax Act taxes (collectively, the “payroll taxes”), and self-employed individuals can take the tax credits against their income tax liability.

The tax credits apply to wages paid for the period beginning on April 1, 2020, and ending on December 31, 2020. In addition, the act ensures that the new benefits paid pursuant to the Emergency Paid Sick Leave Act and Emergency Family and Medical Leave Expansion Act are not treated as wages subject to employer payroll taxes. To prevent these tax credits and exemptions from reducing the Social Security trust funds, revenue from the general fund will be transferred to the trust funds to compensate for the revenue lost by the credits and exemptions.

Tax credits for sick leave

Two tax credits are designed to compensate for sick leave. One is for employers required to provide paid sick leave to their employees pursuant to the Emergency Paid Sick Leave Act. Employers, unless they elect not to take the credit, can take an Employer Sick Leave Credit against payroll taxes for 100 percent of the qualified sick leave wages paid by that employer for that calendar quarter. The act imposes various rules and limitations, however, in determining the amount of paid sick leave to which an employee is entitled and to which an employer is permitted to take into account in computing its Employer Sick Leave Credit.

The amount of qualified sick leave wages is generally limited to $511 per day (with a $5,111 aggregate maximum) for each employee in any of these three circumstances:

• Subject to a federal, state or local quarantine or isolation order related to COVID-19
• Have been advised by a health care provider to self-quarantine due to concerns related to COVID-19
• Experiencing symptoms of COVID-19 and seeking a medical diagnosis

The amount of qualified sick leave wages is generally limited to $200 per day (with a $2,000 aggregate maximum) for each employee in any of these three circumstances:

• Caring for an individual who is subject to a quarantine or isolation order or who has been advised to self-quarantine
• Caring for their children if their children’s school or place of care has been closed or is otherwise unavailable due to COVID-19 precautions
• 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

In addition, the Employer Sick Leave Credit available to an employer is increased by the amount of the employer’s qualified health plan expenses as are allocable to the qualified sick leave wages for which the credit is allowed. Other limitations and special rules apply.

A sick leave tax credit is also available to self-employed individuals. This tax credit is generally available to individuals who are self-employed and who would be entitled to receive paid leave under the Emergency Paid Sick Leave Act if the individual were an employee. The sick leave tax credit for self-employed individuals is calculated similarly to the Employer Sick Leave Credit. A coordination rule prevents individuals who are both an employee and self-employed from benefiting twice.

These tax credits are refundable for both employers and self-employed individuals, subject to certain limitations.

Tax credits for family leave

As with the sick leave tax credits, two tax credits are designed to compensate for family leave. One is for employers required to provide qualified family leave wages to their employees. Employers, unless they elect not to take the credit, can take an Employer Family Leave Credit against payroll taxes for 100 percent of qualified family leave wages paid by the employer during the quarter. For this purpose, qualified family leave wages are the wages and compensation an employer is required to pay pursuant to the Emergency Family and Medical Leave Expansion Act. The maximum amount of qualified family leave wages eligible for the credit is $200 per employee for any day for which the employee is paid qualified family leave wages and cannot exceed, in the aggregate with respect to all calendar quarters, $10,000 per employee. As with the Employer Sick Leave Credit, the Employer Family Leave Credit is increased by the amount of the employer’s qualified health plan expenses that are allocable to the qualified family leave wages for which the credit is allowed.

Like the sick leave tax credit for self-employed individuals, a family leave tax credit is available for self-employed individuals. This tax credit is generally available to individuals who are self-employed and who would be entitled to receive family leave wages if the individual were an employee. The family leave tax credit for self-employed individuals is calculated similarly to the Employer Family Leave Credit. A coordination rule prevents individuals who are both an employee and self-employed from benefiting twice.

These tax credits are refundable for both employers and self-employed individuals, subject to certain limitations.

Claiming the new credits

Employers: The ‘‘Coronavirus Aid, Relief, and Economic Security Act,’’ or ‘‘CARES Act,’’ permits the Employer Sick Leave Credit and the Employer Family Leave Credit to be advanced to employers. The advance refunding of the credits is likely to become the primary means for an employer to obtain the benefits of the credits, given that the CARES Act also defers the payroll tax payment obligations of many employers. Until the IRS issues guidance on advance refunding, however, employers that file IRS Form 941, Employer’s Quarterly Federal Tax Return, would take the credit into account on their IRS Forms 941. Employers are generally required to deposit payroll taxes on a monthly or a semi-weekly basis, with the frequency of the deposit tied to the size of the payroll tax liability.

Self-employed individuals: Because self-employment taxes are reported on the individual’s IRS Form 1040, a self-employed individual would take the applicable sick leave credit or family leave credit for self-employed individuals into account on the individual’s 2020 IRS Form 1040 filed next year. Because self-employment tax is included in estimated tax payments, a self-employed individual would not see the benefit of any sick leave tax credit or family leave tax credit until the individual’s first estimated tax payment. Note that, due to the three-month deferral of federal income tax payments offered in IRS Notice 2020-17, the benefits of the new credits may not be noticeable until the individual’s second estimated tax payment in June 2020.