IRS Updates Guidance on Paid Sick and Family Leave Tax Credits

The IRS posted on its website additional FAQs regarding the refundable tax credits for qualified paid sick leave and qualified paid family leave that are available to small and midsize businesses.

These credits were enacted as part of the Families First Coronavirus Response Act (FFCRA) that was enacted on March 18, 2020. These rules were summarized in a prior article posted to the Withum COVID-19 Resource Center.

There are now 67 FAQs addressing various aspects of these refundable tax credits. Here are some highlights from the new FAQs:

1. Are the sick/family leave wages (“Wages”) taxable to employees?
   Yes, and they are not excludible under section 139, relating to qualified disaster relief payments, because they are income replacements.
2. Are the Wages tax-deductible to the employer?
   Yes.
3. Are the refundable tax credits received by the employer taxable to the employer?
   Yes.
4. Do the tax credits reduce the employer’s deduction for employment taxes?
   No.
5. Can an employer withhold from the Wages employee deductions relating to a 401(k) or a health care plan?
   Yes.
6. Are the Wages subject to federal employment taxes?
   Yes, they are subject to withholding for federal income tax and the employee’s share of Social Security and Medicare taxes.
7. Are the refundable tax credits available to tax-exempt employers?
   Yes.
8. How can employers substantiate their employees’ eligibility for qualified leave wages?
   In general, they should require employees to submit a written request that includes the employee’s name, the dates for which leave if requested, a statement of the reason for the leave and written support for such reason, and a statement that the employee is unable to work or telework for such reason. There are three FAQs dedicated to this important topic.