2020 Year-End Tax Guide

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How much is the credit? The maximum credit is 2/3 of an employee’s regular rate of pay, up to $200 per day or a maximum of $10,000. (The benefit is $2,000 from sick leave plus $10,000 from expanded FMLA for a total of $12,000.) The employer is not required to pay the employee the amount of their regular wages. They are only obligated to pay the employee up to the maximum they are entitled to by law. Who is eligible to claim the credit? Private employers with fewer than 500 employees are required to pay expanded FMLA and are thus eligible for the credit. There is a small business exception for employers with fewer than 50 employees, but the exception only applies in certain limited circumstances. [The small business exception is beyond the scope of this article; please reach out to your Marcum advisor to discuss this further if applicable.] What expenses are eligible for the credit? The credit is equal to the FMLA wages paid (max $200 per day), plus the 1.45% Medicare tax, plus the employer-paid health insurance (including health, dental, vision, prescription drug, and possibly health reimbursement arrangement (HRA) or health FSA contributions). Health insurance should be reduced by the amount of employee contributions. Expanded FMLA requires employees to have been employed by the employer for the previous 30 days. The FMLA 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, any wages paid would not be 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, employer quarterly payroll tax return. 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 Expanded FMLA wages are taxable income to the employee, and subject to federal withholding, Social Security, and Medicare taxes. However, the wages 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 allowed credit, any amount above 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. Additional wages paid on top of the required federal amounts could be eligible for the expanded family leave credit under §45S. Expanded FMLA wages for which a credit is received are not eligible for PPP 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, 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 expanded FMLA 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 advance payment, they should complete form 7202, which is specifically designed for self-employed individuals.