On July 8th, the U.S. Treasury Department and Internal Revenue Service issued Notice 2020-54, Guidance on Reporting Qualified Sick Leave Wages and Qualified Family Leave Wages Paid Pursuant to the Families First Coronavirus Response Act.
According to Notice 2020-54, employers will be required to report qualified leave wage amounts in Box 14 of Form W-2 or on a separate statement. The IRS is in the process of creating a form for those who are self-employed and also receive wages or compensation as an employee. Self-employed individuals will report qualified wage equivalent credit amounts with their income tax return using the forthcoming Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals.
Eligible employers (those employing 500 or fewer employees – including combined groups, as defined by the DOL) and eligible self-employed individuals are entitled to receive certain refundable credits for qualified leave wages (or leave wage equivalents, if self-employed) paid between April 1, 2020, through December 31, 2020, and pursuant to the Families First Coronavirus Response Act (FFCRA). For reporting compliance and eligibility to the credits for qualified wages, these wage amounts must be reported in accordance with the IRS guidance issued in Notice 2020-54.
Defining “Qualified Leave Wages”
The Families First Coronavirus Response Act (FFCRA), enacted on March 18th in response to the COVID-19 crisis, amended the Family & Medical Leave Act of 1993 and established the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family & Medical Leave Expansion Act (EFMLEA).
Emergency Paid Sick Leave Act (EPSLA) – The EPSLA requires eligible employers to pay up to 80 hours of emergency paid sick leave for employees meeting certain conditions. For employees on leave due to: 1) a federal, state, or local quarantine, 2) a quarantine advised by a health provider, or 3) because they are experiencing symptoms of COVID-19 or seeking diagnosis, employers are required to pay 100% of the employee’s regular pay (or, if higher, federal minimum wage or applicable state or local minimum wage). For employees on leave while 4) caring for an individual in quarantine, 5) caring for a child because of school or childcare facility closure, or 6) while experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of Treasury and Secretary of Labor, employers are required to pay 2/3 of the employee’s regular pay rate (or, if higher, federal minimum wage or applicable state or local minimum wage).
Through the CARES Act legislation, a cap was placed on the employer’s emergency paid sick leave requirement per-employee. Employers paying emergency paid sick leave to employees out due to reasons 1 through 3 are required to pay no more than $511 per day and $5,110 in the aggregate. Employers paying emergency paid sick leave to employees out due to reasons 4 through 6 are required to pay no more than $200 per day and $2,000 in the aggregate.
Emergency Family & Medical Leave Expansion Act (EFMLEA) – Under the EFMLEA, eligible employers are required to pay eligible employees up to 10 weeks of paid leave. Eligible employees must have been employed for at least 30 days and must be unable to work or telework during the public health emergency, as they are caring for a child younger than 18 years old because of a school or childcare facility closure. The first two weeks are unpaid, and the subsequent weeks must be paid at 2/3 of their regular rate of pay. The CARES Act amended this legislation, setting a per-employee limit for the employer’s required payment of emergency family medical leave. The Act states an employer is not required to pay more than $200 per day and $10,000 in aggregate per employee.
Employer Reporting Requirements
Employers must report qualified leave amounts with wages paid on Form W-2, Boxes 1, 3 (up to the social security wage base), and 5. Qualified leave wage amounts must also be reported on Form W-2, Box 14 (or on a separate form issued at the same time in the same manner as their W-2). These must be listed as separate amounts based on 1) sick leave wages paid for leave taken due to EPSLA conditions 1, 2, or 3 (see EPSLA paragraph above), 2) for sick leave wages paid for leave taken due to EPSLA conditions 4, 5, or 6, and 3) for qualified family medical leave wages paid to an employee under the EFMLEA.
Recommended Language in Employer Reporting
Notice 2020-54 also provides language guidelines for W-2, Box 14 or separate statement disclosure:
- For sick leave wages paid for leave taken due to EPSLA conditions 1, 2, or 3, the IRS suggests labeling the amount “sick leave wages subject to the $511 per day limit.”
- For sick leave wages paid for leave taken due to EPSLA conditions 4, 5, or 6, the IRS suggests labeling the amount “sick leave wages subject to the $200 per day limit.”
- For qualified medical leave wages paid to an employee under the EFMLEA, the IRS suggests labeling the amount “emergency family leave wages.”
It may be prudent to provide additional instructions and information to employees regarding these reported wages. The IRS-suggested model for employers to use (and edit, as necessary) is as follows:
Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act. Specifically, up to three types of paid qualified sick leave wages or qualified family leave wages are reported in Box 14:
- Sick leave wages subject to the $511 per day limit because of care you required;
- Sick leave wages subject to the $200 per day limit because of care you provided to another; and
- Emergency family leave wages.
If you have self-employment income in addition to wages paid by your employer, and you intend to claim any qualified sick leave or qualified family leave equivalent credits, you must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with your income tax return and reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages. If you have self-employment income, you should refer to the instructions for your individual income tax return for more information.
If a business has paid, or is paying, qualified leave wages, it is subject to these reporting requirements. It’s good practice for these employers to touch base with their payroll providers to ensure 2020 W-2s are on track to capture the information needed to comply with this guidance.
The IRS has a dedicated webpage for FAQ on COVID-19-related tax credits for required paid leave.
The DOL has FFCRA resources available that may also be helpful. Details on employer and employee FFCRA requirements, eligibility, and coverage may be found on their FFCRA Q&A page, and additional Information may be found on their page dedicated to Employee Paid Leave Rights.
ARB is dedicated to updating our clients and community as the legislative implications of the COVID-19 pandemic continue to unfold. Contact us if you have questions on this information, or visit our COVID-19 Financial Resource and Tax Center for information on related matters.
by Tom Flood