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IRS Announces Effective Date for Payroll Tax Credits Under COVID-19 Legislation
Practical Law Legal Update w-024-7320 (Approx. 4 pages)
IRS Announces Effective Date for Payroll Tax Credits Under COVID-19 Legislation
by Practical Law Employee Benefits & Executive Compensation
| Published on 30 Mar 2020 • USA (National/Federal) |
The Internal Revenue Service (IRS) has provided the effective date for refundable payroll tax credits regarding sick leave and family leave wages that must be paid under the Families First Coronavirus Response Act (Pub. L. No. 116-127). Under the IRS guidance (Notice 2020-21), the tax credits are available for wages paid for the period between April 1, 2020, and December 31, 2020.
The IRS has announced the effective date for refundable payroll tax credits relating to sick leave and family leave wages that must be paid under the Families First Coronavirus Response Act (Pub. L. No. 116-127 ("Families First Act"); see Legal Update, COVID-19 Legislation Includes Group Health Plan Coverage Requirements). The Families First Act was enacted in response to the US outbreak of COVID-19, the disease caused by SARS-CoV-2 (2019 Novel Coronavirus). Under the IRS guidance, the tax credits are available for wages paid for the period between April 1, 2020, and December 31, 2020 (Notice 2020-21 (Mar. 27, 2020)).
For more information on the COVID-19 pandemic, see Practical Law's Global Coronavirus Toolkit and Practice Note, COVID-19 Compliance for Health and Welfare Plans.
Families First Act Provides for Refundable Payroll Tax Credits
As background, the Families First Act requires small and mid-sized employers to provide paid sick leave and expands the Family and Medical Leave Act (FMLA) for absences related to COVID-19 (see Article, Expert Q&A: COVID-19 and Employment). The Families First Act also provides for tax credits relating to sick leave and family leave wages that must be paid under the statute. These credits are increased for "qualified health plan expenses" that are allocable to the wages. Employers will be allowed to claim the credits based on qualifying sick leave and family leave wages paid:
- Beginning on a date selected by Treasury that falls during the 15-day period beginning on the Families First Act's enactment date (Mar. 18, 2020).
- Ending on December 31, 2020.
Equivalent tax credits are available for self-employed individuals.
In subsequent guidance:
- The DOL provided that the Families First Act's sick leave and family leave wages provisions are effective on April 1, 2020.
- The IRS addressed how the statute's tax credits coordinate with an employer's payment of payroll taxes (see Legal Update, IRS Addresses Payroll Tax Credits for Leave Under COVID-19 Legislation).
For more information on the Families First Act, see Legal Updates, COVID-19 Legislation Includes Group Health Plan Coverage Requirements and Families First Coronavirus Response Act Mandates Paid Sick and Expanded FMLA Leave for Many Employees.
Effective Date for Tax Credits
In Notice 2020-21, the IRS provided that the effective date for the refundable payroll tax credits under the Families First Act is April 1, 2020. Accordingly, the period during which tax credits are available for employers and self-employed individuals is April 1, 2020, to December 31, 2020.
Practical Impact
As the IRS notes, the April 1, 2020, effective date chosen by Treasury is consistent with the DOL's chosen effective date for employer compliance with the paid sick leave and expanded FMLA leave requirements under the Families First Act. We're expecting additional payroll tax credit guidance in the near future, including procedures for use by employers in requesting accelerated payment of leave amounts in certain situations.