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Friday, March 27, 2020

COVID-19 paid sick leave and payroll tax credits: preliminary information

The Department of Labor, Treasury and IRS have released preliminary bulletins concerning the Families First Coronavirus Response Act (FFCRA) passed on March 18, 2020, an expansion of the Family Medical Leave Act:

Department of Labor:

Families First Coronavirus Response Act: Questions and Answers

Families First Coronavirus Response Act: Employer Paid Leave Requirements

Families First Coronavirus Response Act: Employee Paid Leave Rights



Treasury, IRS and Labor announce plan to implement Coronavirus-related paid leave for workers and tax credits for small and midsize businesses to swiftly recover the cost of providing Coronavirus-related leave (March 20, 2020, IR-2020-57)

This guidance is limited to sick leave paid specifically to employees who meet one of six specific criteria as outlined in the foregoing links.  

The IRS indicates that further guidance will be forthcoming "next week."  There are questions surrounding the tax handling, withholding, and payroll tax "credits" that employers will be able to take.   Employers have to provide sick pay for eligible employees but do not have to take the tax credits (which if they do, appear to have to then need to be added to company business income for 2020) and there can be complications/conflicts with any existing sick leave plans and policies.

Amounts paid (subject to the per day maximums based on which of the criteria applies) represent taxable income to the employee and normal social security/medicare taxes and federal and state (if applicable) income tax withholdings apply, and are subject to normal reporting requirements; but, the employer can apparently then take gross wages, and the FICA/medicare match or some portion thereof along with applicable health insurance premiums paid relative to the sick or care-providing employee as a credit against the next payroll tax deposit that is due.  Our interpretation of how this will work, so far, is that all of the amounts paid to the employee should be treated as ordinary income and therefore all of the normal deductions would apply (there are references out there to these amounts are not being subject to FICA; that does not appear to be the case).   Normal FICA/medicare, federal and state withholding tax, and other elective deductions apply to the gross wage amounts paid (which in Advanced Accounting should be classified as "Sick pay" with possible sick pay accrual adjustments if you already have a sick leave policy).   Amounts withheld for state/local income taxes should again be processed and paid in the normal way.  Payroll tax amounts would be transferred to accounts payable as usual (PR-M in Advanced Accounting) and initially calculated in the same way.  Calculated credits for amounts related to COVID-19 sick leave benefits would then be entered as a credit memo/voucher in Advanced Accounting's AP-B which then can be taken prior to making the EFTPS tax payment. The gross wages paid along with calculated health insurance premiums and FICA/medicare matches may need to be preferably credited to a "sick leave tax credits" income account or some other miscellaneous income account when making the AP-B credit memo, rather than directly reducing any of the original expense accounts.

It is unclear what, if any, payroll withholding logic changes will need to be made depending on reporting requirements that may evolve (will these amounts for example be required to be reported separately from regular wages on W-2 forms?) nor how employers should track applicable sick leave exactly in time and attendance and payroll systems.

The law goes into effect as of April 1, 2020 and continues through the end of the year.

We stand ready to make whatever changes may be required to the Advanced Accounting 8 payroll system once further sufficient details are available (the examples currently provided are insufficient to actually institute any changes at this time) when the first payrolls in early to mid-April come into play.   Employers should plan on keeping logs and utilize additional tracking methods as well as to gather the information required as outlined in the preliminary notices. Payroll processing will not be getting any easier.

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