On March 18, 2020, the Families First Coronavirus Response Act (H.R.6201) was signed into law. This bill provides federal funding for coronavirus-related leave for employees of small and midsize businesses with less than 500 employees.1
In this article, we examine how this credit works for small business owners and the cash-flow implications for small businesses.
Tax credit reduces payroll taxes
Normally, employers are required to make deposits with the IRS for Social Security and Medicare taxes (payroll taxes) by the 15th day of the month following the month when wages are paid. These deposits include both the employer and employee portion of the payroll taxes.
The federal government is reimbursing businesses dollar-for-dollar for the amount that they spend on coronavirus-related paid sick leave and paid child care leave through payroll tax credits.
For example, if a business was ordinarily required to pay $5,000 in payroll tax deposits for a pay period, and it paid $3,000 in paid sick leave, then the business could deduct the $3,000 paid for paid sick leave, and its payroll tax obligation would be $2,000.
If a business’ coronavirus-related leave payments exceed its payroll tax deposits, the business can apply for an accelerated tax refund from the IRS. Currently, the IRS expects to process these requests in two weeks or less.
For example, if a business is required to pay $10,000 in payroll taxes, but it paid $12,000 in coronavirus-related leave, the business would pay zero in payroll taxes and apply for an accelerated tax refund from the IRS. The IRS would pay the business an additional $2,000 as a tax refund.
Multiple employees taking leave can cause a cash squeeze for employers
Although the leave in this bill is fully funded by the federal government through refundable payroll tax credits, this new mandated leave provision can cause problems with cash flow for small businesses in certain circumstances. In particular, if employers have multiple employees taking leave at the same time, the new leave provisions can cause a cash shortage for small businesses. This cash shortfall is primarily due to a timing issue between when an employer needs to pay for the leave and when the employer receives a tax refund from the IRS.
This cash shortage is of particular concern to small businesses, as half of small businesses with less than 500 employees have less than a month of cash reserves available, and many main street small businesses have only a few weeks of cash available.2 Additionally, many small businesses are experiencing drops in demand from the macroeconomic environment, further affecting their cash flow.
Example Scenario
Consider a small business with ten employees who each earn $1,500 per week. Over a one-week pay period, total payroll would be $15,000 for the business. The combined employer and employee payroll taxes on payroll amounts to approximately 15.3% of payroll, which is $2,295. This amount would normally be withheld for remittance to the IRS, but is available to the business to cover COVID-19 related sick leave.
If this business were to have three employees out sick with suspected COVID-19 symptoms for one week, while scheduling other employees to cover these shifts, the business would have a cash outlay of $4,500 to cover the paid sick leave. $2,295 of the cash outlay would be covered by the withheld payroll tax credit, but the small business would be responsible for coming up with an additional $2,205 to cover the cost of the leave.
The business would ultimately be reimbursed by the IRS by filing an accelerated tax refund claim, but the IRS claim will require processing time (currently two weeks or less, according to the latest IRS guidance). In the meantime, the small business would need to find additional cash to cover this paid leave to comply with the new law, which may be challenging for small businesses with low cash balances and that are grappling with declining sales.
FAQ: Coronavirus-related Leave for Small Businesses
What does the Families First Coronavirus Response Act (H.R.6201) mean for small businesses?
Under this law, businesses with less than 500 employees are required to provide two types of coronavirus-related leave to their employees between April 2, 2020 and December 31, 2020:
- Up to ten days of paid sick leave
- Up to ten weeks of paid child care leave for employees whose children’s schools or child care provider is closed for reasons related to coronavirus
The federal government will be fully reimbursing businesses for the cost of providing this leave through payroll tax credits as described below.
Also, businesses won’t need to pay payroll taxes on the value of the paid sick leave or paid child care leave.
What is coronavirus-related paid sick leave?
Businesses are required to offer ten days of paid sick leave to employees that can be taken for one of two reasons:
- Employee is experiencing COVID-19 symptoms or is quarantined
- Employee would be paid at 100% of regular pay, up to $511 per day
- Employee’s child’s school or child care provider is closed for COVID-19 related reasons
- Employee would be paid at two-thirds of regular pay, up to $200 per day
Employees can take this leave without being required to use regular sick days if a company already offers them.
What is coronavirus-related paid child care leave?
Businesses are required to offer ten weeks of paid child care leave to employees when:
- Employee’s child’s school or child care provider is closed for COVID-19 related reasons
- Employee would be paid at two-thirds of regular pay, up to $200 per day
The employee is required to use the ten days of paid sick leave first before using the paid child care leave. Employees can take this leave without being required to use regular sick days if a company already offers them.
What about part-time workers?
Part-time employees are also eligible for a proportional number of paid sick leave hours based on the number of hours they typically work during a two-week period.
What about health insurance costs for employees on leave?
There is an additional credit available to employers that can cover the costs of continuing the employee’s health insurance coverage while the employee is on leave.
Does this apply to businesses with less than 50 employees?
Yes. However, there is an exemption to the leave because of school closings or child care unavailability (under both paid sick leave and paid child care leave) that a business can apply for if its business viability would be threatened by providing this leave for businesses with less than 50 employees.
Sources
1. IRS News Release IR-2020-57
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
2. JP Morgan Chase & Co.
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