No further pandemic relief in the pipeline, but you still have options

pandemic relief, tax credit, paid leaveWell, it seems to be official—there won’t be another big pandemic relief bill prior to the election and possibly not after the election, either.

For employees who have already run out of pandemic-related sick leave and need more, another section of the tax code—IRC § 45S—offers a corporate tax credit for voluntarily providing a minimum of two weeks of paid FMLA leave to certain employees.

Good, but limited: The corporate tax credit wouldn’t cover employees who are home and not telecommuting because their kids are remote-learning.

And since this is a corporate credit, you won’t be double-dipping on your pandemic-related payroll tax credit, which, presumably, you’ve exhausted.

Note: Because it’s more generous, you should use your pandemic-related payroll tax credit first.

IRC § 45S for pandemic relief

The Tax Cuts and Jobs Act hasn’t been kind to employers. It’s required a complete overhaul of the W-4 and the withholding process disallowed your corporate deduction for providing employees with qualified transportation fringe benefits and disallowed your corporate deduction for business-related entertainment expenses employees incur on your behalf.

IRC § 45S is the exception. Similar to the pandemic-related paid sick leave provisions, under this section of the tax code, full-time employees (i.e., those who work at least 30 hours a week) are entitled to a minimum of two weeks of paid FMLA leave and part-time employees are entitled to a proportionate amount of paid leave.

But the similarities end there. To qualify for the IRC § 45S credit:

  • Employees must have worked for you for at least one year and not have earned more than $75,000 during 2019
  • You must pay them at least 50% of their salary while they’re on leave
  • Paid leave must be provided under a written policy, which must be in place before employees take leave. Specificity counts: Your policy must stipulate that paid leave is FMLA-qualifying leave. Your policy won’t pass muster if, say, it gives employees three weeks of leave for any of these reasons: FMLA purposes, minor illnesses, vacations or other personal reasons
  • Employers not covered under the FMLA and employers extending paid leave to employees who would otherwise not qualify for FMLA leave may also take the credit, if their written policies contain a noninterference clause. Model IRS language: [Employer] will not interfere with, restrain or deny the exercise of or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.

The credit equals 12.5% of wages paid and increases 0.25%, up to 25% for each percentage point above which your rate of pay exceeds 50%.

Example. Mega’s policy provides qualifying employees with four weeks of paid FMLA leave at 75% of their salary. Result: Since Mega’s rate of pay exceeds 50% by 25%, its tax credit is 18.75% (0.25% × 25 = 6.25% + 12.5%). During 2020, Emma takes four weeks of leave. She’s normally paid $1,000 a week, so she receives $3,000 ($750/week × 4 weeks) for her leave. Result: Mega’s credit-related to Emma is $562.50 ($3,000 × 18.75%).

State law wrinkle

If you must provide paid leave under state or local laws, you technically can’t take the credit, but the IRS has developed a workaround: You remain eligible for the credit if you independently satisfy the requirements to take it. In effect, although your paid leave runs concurrently or consecutively with state-mandated leave, your federal tax credit is based only on wages paid under your policy and not state law.

Claiming the credit

File Forms 8994 and 3800 to take the credit.

No double-dipping: Wages taken into account for other credits can’t be used again for this credit. Likewise, you can’t take a salary deduction for wages against which you take the credit.