Much has been made of the cost to employers of the leave required by the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act, which have now been passed by Congress and await the President’s signature. Under these new laws, if a non-governmental employer is required to pay wages to employees as a result of either Act, they are entitled to substantial tax relief.

Emergency Paid Sick Leave Act Relief

Under the Emergency Paid Sick Leave Act, employers are entitled to a refundable credit against employer Social Security and Medicare taxes for up to ten days of each employee’s compensation paid under the Emergency Paid Sick Leave Act. The daily tax credit is limited to either $511 or $200, depending on the reason the leave was taken, in alignment with the maximum payments under the Emergency Paid Sick Leave Act. Certain payments made by an employer to a group health plan may increase the credit. There are technical provisions to prevent multiple tax benefits from arising out of this credit (i.e., no “double dipping”).

In addition, wages paid as a result of the Emergency Paid Sick Leave Act are not included for purposes of determining employer Social Security taxes owed.

Emergency Family and Medical Leave Expansion Act Relief

Employers are entitled to a refundable credit against their Social Security and Medicare taxes for up to $10,000 of each employee’s compensation paid under the Emergency Family and Medical Leave Expansion Act. The daily tax credit is limited to $200, which again aligns with the maximum payment under the Emergency Family and Medical Leave Expansion Act. This credit may also be increased by certain payments made by an employer to a group health plan, and again there are technical provisions to prevent multiple tax benefits from arising out of this credit.

In addition, wages paid as a result of the Emergency Family and Medical Leave Expansion Act are not included for purposes of determining employer Social Security taxes owed.

Examples

A non-governmental employer has two employees needing coverage.

Employee 1 earns $300 in wages per day and requires 10 days of self-quarantine as advised by their medical provider. As a result, the employee would receive $300 in wages per day, or $3,000, under the Emergency Paid Sick Leave Act.

Employee 2 earns $300 in wages per day. Employee 2 cannot work or telework for twenty days (four weeks) as a result of caring for a child due to a school closure. As a result, the employee would receive $200 in wages per day for the first ten days under the Emergency Paid Sick Leave Act and $200 in wages per day for the second ten days under the Emergency Family and Medical Leave Expansion Act for a total of $4,000.

Total expenditure by employer in wages for both employees: $7,000

Ordinarily this $7,000 would result in employer-side Social Security tax at a rate of 6.4% for a cost of $448.

The legislation eliminates the $448 employer-side social security tax. Note, the legislation does not eliminate other employer-side payroll taxes (including Medicare).

For Employee 1, the employer receives a $3,000 tax credit against quarterly employer-side Social Security and Medicare payments. For Employee 2, the employer receives a $4,000 tax credit against quarterly employer-side Social Security and Medicare payments. If there are insufficient quarterly payroll taxes to credit, the credit is refundable to the employer.

In these examples, the maximum amount of Emergency Paid Sick Leave Act time has been used by both employees, and so the employer has received the maximum tax credit for those employees for that benefit. For Employee 2, $2,000 out of a maximum $10,000 Emergency Family and Medical Leave Expansion Act tax credit has been used.

These tax credits and exemptions are designed to help employers meet the cost of the new mandated benefits. While substantial, they do leave open issues of cash flow that perhaps will be alleviated in additional pieces of legislation expected to follow.