Legal Insights

Employment Tax Aspects of the Coronavirus Response Act

March 23, 2020
By: James R. Malone Jr.

The Families First Coronavirus Act (the “Act”) has significant employment law implications, as it imposes new leave provisions under the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act, summarized here. The Act also has significant employment tax implications. To understand them, some background is in order.

Background

Employment taxes include taxes collected under the Federal Insurance Contributions Act, or FICA, as well as income tax withholding. Employers are required to deposit periodically three distinct taxes:

• The FICA tax on employees, which is deducted from their wages, I.R.C. § 3102(a);
• The FICA tax on employers, which is paid directly by the employer, I.R.C. § 3111;
• Income tax, which is also deducted from employees’ wages, I.R.C. § 3402(a)(1).

These taxes are reported quarterly on Form 941.

The FICA tax has two components: First, there is a 6.2% tax that funds Social Security benefits, I.R.C. §§ 3101(a) (tax on employees), 3111(a) (tax on employers); second, there is a 1.45% tax that funds Medicare benefits, I.R.C. §§ 3101(b) (tax on employees), 3111(b) (tax on employers).

When taxes are withheld from another person, they are impressed with a trust in favor of the United States. I.R.C. § 7501(a). As a consequence, taxes collected from others on behalf of the government are often referred to as trust fund taxes. That status has serious consequences:

• Those who willfully fail to collect, account for, and pay trust fund taxes may be assessed with a penalty equal to the amount due. I.R.C. § 6672(a).
• They may also be prosecuted under section 7202 of the Internal Revenue Code for the same conduct, which is a felony. I.R.C. § 7202.

Out of the three tax streams that are reflected on Form 941, the employees’ FICA and income taxes are trust fund taxes, while the employer’s FICA tax is not.

Tax Implications of the Act

What the Act does is provide for temporary changes through the end of the year to the employer’s FICA taxes; the trust fund taxes collected from employees remain unchanged. The changes are designed to coordinate with the leave provisions of the Act. The tax provisions are somewhat jumbled; consequently, the following summary does not address the provisions of the Act in order.

First, the Act provides that employers will not owe the Social Security portion of the FICA taxes on wages paid to employees who are on leave: “Any wages required to be paid by reason of the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act shall not be considered wages for purposes of section 3111(a) of the Internal Revenue Code of 1986.” Pub. L. 116-127, 116th Cong. 2d Sess., 134 Stat. _, § 7005(a).

This eliminates the 6.2% Social Security tax as to wages paid to employees on leave, but, under the plain language of this provision, the 1.45% Medicare tax must still be paid. The employer receives an offsetting credit for this amount.

In addition, employers will still be obligated to collect the employee’s FICA tax and income tax from wages paid to employees who are on leave.

Second, the Act provides employers with a FICA credit on account of wages paid to employees on leave under the emergency paid sick leave provisions of the Act:

• There is a credit for “qualified sick leave wages.” Id., § 7001(a). “Qualified sick leave wages” are defined as wages paid under the Emergency Paid Sick Leave Act. Id., § 7001(c). They are subject to certain caps as described below.
• There is also a credit of 1.45% on “qualified sick leave wages.” Id., § 7005(b)(1).

The qualified sick leave wages are equal to $200 per individual per day. § 7001(b)(1). That amount increases to $511 per day for leave taken in the following situations:

1. The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID–19.
2. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID–19.
3. The employee is experiencing symptoms of COVID–19 and seeking a medical diagnosis.

Id., § 5102(a)(1)-(3); see id., § 7001(b)(1).

The credit will be increased “by so much of the employer’s qualified health plan expenses as are properly allocable to the qualified sick leave wages for which such credit is so allowed.” Id., § 7001(d)(1). The allocation rules are not explicitly covered in the Act and will be addressed by Treasury, which is given discretion over the subject. Id., § 7001(d)(3). There is a presumption that a proration based on each employee’s days of work and days of leave, but Treasury is free to change that.

The credit is refundable, which is significant. To avoid double benefits, the credit will be added to the employer’s income for the year.

Third, there is a similar credit for wages paid under the Emergency Family and Medical Leave Expansion Act, known as “qualified family leave wages.” Id. § 7003(a). The credit includes the Medicare tax. Id., § 7005(b)(1).

“Qualified family leave wages” are defined as wages that the employer is required to pay under the Emergency Family and Medical Leave Expansion Act. Id. § 7003(c). The wages taken into account per individual are $200 per person per day, and $10,000 in the aggregate. § 7003(b)(1).

The other provisions mirror those for credits under the Emergency Paid Sick Leave Act.

Timing remains to be addressed:

• Form 941 is filed quarterly, which is when the credits would arise;
• Tax deposits are typically made twice a month, creating a lag between the deposit obligation and the availability of the credit.
• The Act gives the Secretary of the Treasury authority to issue regulations providing for a waiver of penalties where deposits are delayed in anticipation of applicable credits. Id. §§ 7001(f)(3), 7003(f)(3).

The Upshot

Employers will not need to pay the 6.2% Social Security tax on wages paid to employees who are on leave under either the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act. The 1.45% Medicare tax must still be paid, but there will be an offsetting credit.

Employers will receive FICA credit (including the 1.45% Medicare tax) for wages paid to employees who are on leave under either the Emergency Paid Sick Leave Act, or the Emergency Family and Medical Leave Expansion Act, which can be used cover their FICA obligations on the wages paid for those employees who are not on leave. The credit is refundable.

Trust fund tax obligations are unchanged. Employers should continue to withhold FICA and income tax for all employees’ wages, whether they are on leave or not.

The Tax Section of the American Bar Association has been asked to provide comments on the Act, which may lead to some clarification of the Act through regulatory pronouncements.