IRS Addresses Employer Reporting Rules for FFCRA Credits and Self-Employed Individuals | Practical Law

IRS Addresses Employer Reporting Rules for FFCRA Credits and Self-Employed Individuals | Practical Law

The Internal Revenue Service (IRS) has issued guidance for employers addressing the reporting of qualified sick leave wages and qualified family leave wages paid to employees under the Families First Coronavirus Response Act (FFCRA) (Notice 2020-54). The guidance is intended to help self-employed individuals who also receive qualified paid leave wages from an employer determine the amount by which they must reduce their claimed qualified sick leave equivalent or qualified family leave equivalent tax credits.

IRS Addresses Employer Reporting Rules for FFCRA Credits and Self-Employed Individuals

by Practical Law Employee Benefits & Executive Compensation
Published on 10 Jul 2020 • USA (National/Federal)
The Internal Revenue Service (IRS) has issued guidance for employers addressing the reporting of qualified sick leave wages and qualified family leave wages paid to employees under the Families First Coronavirus Response Act (FFCRA) (Notice 2020-54). The guidance is intended to help self-employed individuals who also receive qualified paid leave wages from an employer determine the amount by which they must reduce their claimed qualified sick leave equivalent or qualified family leave equivalent tax credits.
The IRS has issued guidance addressing employer reporting requirements for qualified sick leave wages and qualified family leave wages paid to employees under the Families First Coronavirus Response Act (FFCRA) (Notice 2020-54 (July 8, 2020)). The FFCRA is one of the key pieces of federal legislation enacted in response to the US outbreak of COVID-19, the disease that results from SARS-CoV-2 (see Practice Note, COVID-19 Compliance for Health and Welfare Plans: Federal Legislation Enacted in Response to COVID-19). The Form W-2 reporting requirements at issue in the IRS's guidance will help self-employed individuals who also receive qualified paid leave wages from an employer determine the amount by which they must reduce their claimed qualified sick leave equivalent or qualified family leave equivalent tax credits.
For a continuously updated collection of resources related to COVID-19, see Practical Law's Global Coronavirus Toolkit.

FFCRA Paid Leave and Payroll Tax Credit Provisions

As background, the FFCRA requires certain employers to provide the following two types of paid leave wages for COVID-19-related absences:
  • Qualified sick leave wages under the FFCRA's "Emergency Paid Sick Leave Act" (EPSLA).
  • Qualified family leave wages under the FFCRA's "Emergency Family and Medical Leave Expansion Act" (EFMLEA).
(See Practice Note, COVID-19: FFCRA Paid Sick Leave and Family Leave FAQs and Article, Expert Q&A: COVID-19 and Employment.)
The two types of FFCRA wages are collectively referred to as "qualified leave wages."
Employers that must pay FFCRA qualified leave wages are eligible for fully refundable payroll tax credits to cover the cost of the leave wages (see Article, IRS Guidance on COVID-19 Paid Leave Tax Credits Under the FFCRA). These credits also may reflect "qualified health plan expenses" (for example, the cost of insured health plan coverage) that are allocable to the wages.
For each quarter, the refundable tax credits are available against the employer's share of:

FFCRA Provisions for Self-Employed Individuals

The FFCRA also includes provisions specific to self-employed individuals. Specifically, the FFCRA permits refundable tax credits for self-employed individuals against income tax imposed on self-employment for:
  • Qualified sick leave "equivalent" amounts.
  • Qualified family leave "equivalent" amounts.
However, the FFCRA imposes a cap on qualified sick leave equivalents in situations where a self-employed individual:
  • Is eligible for a refundable credit for a qualified leave equivalent amount.
  • Also receives qualified sick leave wages as an employee.
Similarly, the FFCRA imposes a cap on qualified family leave equivalents in situations where a self-employed individual:
  • Is eligible for a refundable credit for a qualified family leave equivalent amount.
  • Also receives qualified family leave wages as an employee.

Guidance on Reporting Paid Leave Wages to Employees

Self-employed individuals who also receive wages as employees must have information about their FFCRA qualified leave wages to properly claim qualified sick leave equivalent or qualified family leave equivalent credits for which they are eligible. As a result, employers must report to employees the amount of qualified sick leave wages and qualified family leave wages paid to the employees under the FFCRA. In particular, employers must separately report amounts paid to an employee in the following three categories:
  • Qualified sick leave wages paid to employees under the EPSLA's self-care provisions. These wages are subject to a $511 per day limit ($5,110 in total).
  • Qualified sick leave wages paid to employees under the EPSLA provisions for caring for others. These wages are subject to a $200 per day limit ($2,000 in total).
  • Qualified family leave wages under the EFMLEA.
Employers must include these amounts in Box 14 (Other) of the employee's Form W-2 or a separate statement. In addition, employers must label these amounts in Box 14 so that they are identifiable (for example, using language such as "sick leave wages subject to the $511 per day limit," "sick leave wages subject to the $200 per day limit," or "emergency family leave wages"). (Employers also report qualified sick leave and qualified family leave wages paid to employees in Boxes 1, 3, and 5 of Form W-2.)
(For more information, see Article, IRS Guidance on COVID-19 Paid Leave Tax Credits Under the FFCRA: Qualified Sick Leave Wages and Qualified Family Leave Wages.)
If an employer uses a separate statement (rather than Form W-2) to report the amounts, the statement must be:
  • Included with Form W-2 (in the case of paper Forms W-2).
  • Provided in the same manner and at the same time as the Form W-2 (in the case of electronically provided Forms W-2).
Self-employed individuals who are claiming qualified sick leave equivalent or qualified family leave equivalent credits must then report their qualified sick leave and qualified family leave wage amounts (as reported by the employer) using Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals). In doing so, self-employed individuals reduce the amount of any qualified sick leave equivalent or qualified family leave equivalent tax credits they claim by the amount of the qualified leave wages.
The IRS's guidance also provides model language that employers may include in their reporting to explain qualified sick leave and qualified family leave wages and the effect such wages have on tax credits claimed by self-employed individuals.

Practical Impact

The FFCRA paid leave wages and accompanying refundable tax credit provisions have presented significant compliance considerations for employers' payroll departments. This latest IRS guidance offers employers a clearer picture of the Form W-2 tracking and reporting considerations related to the FFCRA paid leave wages – especially with regard to self-employed individuals. The IRS has also issued FAQ guidance that addresses credit calculation issues for self-employed individuals involving the FFCRA paid leave wages.