2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

COVID-19 Federal Wage-Related Tax Credits

Full-time employees are eligible for 80 hours of sick leave. Part- time employees are eligible for the average number of hours typically worked in a 2-week time span. Emergency paid sick leave is in addition to the employer’s existing sick leave policies. The employer cannot require employees to use other paid leave first. Employees are eligible for leave regardless of the length of their employment. (This is in contrast to expanded FMLA which requires employees to be employed for the previous 30 days.) The sick leave must be taken when the employer has work for the employee to do. If there’s no work for the employee to do as a result of a shelter-in-place or stay–at-home order, the employee is not qualified for the credit. What are the effective dates? The credit is effective for wages paid April 1 through December 31, 2020. How to claim the credit The credit can be claimed on form 941, the employer quarterly payroll tax returns. However, an employer may request an advance payment of the credit on form 7200. The employer can file multiple forms 7200 per quarter. Interaction with PPP loan, income taxes, and other credits Sick leave wages are taxable income to the employee, and subject to federal withholding, Social Security, and Medicare taxes. However, sick leave wages up to the daily limit are not subject to the 6.2% Social Security payroll tax to the employer. If the employer elects to pay the employee regular wages which exceed the maximum required federally, any amount beyond the limit are considered regular wages and would be subject to 6.2% Social Security payroll tax. To report the credit on the annual income tax return, include the full amount of the credit in gross income. Then, expense wages, health insurance expense, and the Medicare 1.45% payroll tax as usual. Even though the credit is included in income, the net effect is zero because the correlating costs are expensed.

Sick leave wages for which a credit is received are not eligible wages attributable for Paycheck Protection Program (PPP) loan forgiveness. Documentation and retention period The employer is obligated to retain an employee statement that includes basic information to substantiate the reason for the leave. The IRS requires written documentation to be retained. Additionally, the employer should retain documentation of the qualified health plan expenses and credit calculations. After claiming the credit on form 941, the taxpayer should retain all documentation for at least four years. Provisions for self-employed Taxpayers who are self-employed are also able to take advantage of the sick leave credit. The tax benefit would be netted against self- employment tax liability, usually paid quarterly through estimated tax payments. The credit is not reported on form 941. Instead, a self-employed individual can claim the credit on form 1040, or reduce their quarterly estimated tax vouchers for the corresponding credit. If self-employed individuals would like to request advance payment, they should complete form 7202, which is specifically designed for self-employed individuals. Emergency sick leave is effective for two weeks only. However, expanded FMLA is effective for up to 12 weeks. In expanded FMLA, the first two weeks are unpaid, and the next 10 weeks are paid. The two credits work in tandem to create a total of 12 paid weeks. COVID-19-related FMLA is called “expanded” FMLA because the FMLA credit was implemented effective January 1, 2018, under §45S. The Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded allowable reasons to encompass caring for a child whose school or place of work is closed (or child care provider is unavailable) related to COVID-19. EXPANDED FAMILY LEAVE CREDIT Purpose