Small- and mid-sized employers, including churches, now must provide paid sick and family leave to employees who are unable to work due to certain absences related to the COVID-19 (coronavirus) outbreak. Ordinarily, providing paid leave will not directly increase out-of-pocket payroll costs because paying an employee for time on leave costs no more than paying the employee while he or she is at work.
However, in the aggregate, allowing employees to take paid leave without using their paid time off represents a business cost. When Congress mandated paid leave, it also allowed businesses to recoup that cost.
Any church or religious organization that withholds payroll taxes for employees is eligible to participate.
How it works
New federal regulatory guidance details how employers can recoup qualifying paid leave expenditures under the newly adopted Emergency Family and Medical Leave Expansion Act (FMLA+) and the Emergency Paid Sick Leave Act (EPSLA). Specifically, the Internal Revenue Service (IRS) and US Department of Labor (DOL) have specified a process “designed to immediately and fully reimburse (employers), dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees.”
The guidance emphasizes that employers have “complete coverage” for paid leave costs. Employers will receive 100-percent reimbursement for mandated paid leave as well as health insurance costs. However, this coverage applies only to paid leave occurring on or after April 1, 2020, and prior to the end of this year.
The guidance is designed to provide nearly immediate reimbursement of paid leave costs by means of a credit on quarterly payroll filings. Specifically:
- Employers file quarterly federal tax returns (Form 941) to report income taxes, social security tax, and Medicare tax withheld from employees’ paychecks and to remit the employer’s portion of Social Security and Medicare taxes.
- Employers who pay qualifying sick or childcare leave can withhold from the quarterly payroll tax payment an amount equal to the cost of the paid leave.
- The payroll taxes that employers may retain include withheld federal income taxes, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.
If the paid leave exceeds what the employer would have submitted to the IRS, the employer may request the difference from the IRS. The IRS indicates that it expects to pay the difference as a refund within two weeks of the request.
Paid leave tied to COVID-19 is to be paid at an employee’s regular rate of pay or, in some cases, two-thirds of the regular rate of pay. The regular rate of pay is not simply the wage an employee was earning when leave commenced. It is the average rate of pay during the preceding six months. For an employee who has worked less than six months, the rate is the average weekly rate during that time.
Also, Congress placed maximums on paid leave costs, and employers will not be able to obtain paid leave credit beyond those (except as noted in the next section). If an employee is on leave because he or she is unable to work due to a coronavirus quarantine or self-quarantine, or has coronavirus symptoms and is seeking a medical diagnosis, employers need not pay more than a daily maximum paid sick leave of $511, up to 10 days (or $5,110).
If an employee is entitled to paid leave because he or she is caring for someone with coronavirus, or is caring for a child because the child’s school or childcare facility is closed, or the childcare provider is unavailable due to the coronavirus, the maximum is $200 per day, or $2,000 in the aggregate. Finally, if an employee is unable to work to care for a child whose school or childcare facility is closed or whose childcare provider is unavailable due to the coronavirus, employers may receive a childcare leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day, or $10,000 in the aggregate.
Health care costs credit
An employer may receive a credit above and beyond the just-discussed maximums by adding an amount equal to the cost of maintaining health insurance coverage for the eligible employee during the paid sick leave period. It is not yet clear whether this credit will cover both the employer and employee shares of health insurance coverage.
Application to pastors
The payroll credits for required paid sick and family leave present an interesting wrinkle in terms of how they apply to ministers. All ministers are treated as “statutory self-employed individuals” for Social Security and Medicare purposes. They individually pay for Social Security and Medicare coverage under the Self-Employment Contributions Act, or SECA. The availability of the payroll tax credits for sick and family leave are available only with respect to wages that qualify as “qualified sick leave wages” or “qualified family leave wages,” respectively. These terms are defined in the applicable legislative text as wages “as defined in [Internal Revenue Code] section 3121(a).” The wrinkle for ministers emerges because remuneration paid to a minister is excluded from the term “wages” as defined in section 3121(a) of the Code, and salary paid to a minister thus cannot be “qualified sick leave wages” or “qualified family leave wages.”
But all is not lost. A credit is available for qualifying sick and family leave to an “eligible self-employed individual,” and a minister does fall within the definition of that term. The available credit is applied against the eligible self-employed individual’s income tax.
This appears to produce an interesting situation for ministers who are treated as an employee by their church for federal income tax purposes (that is, as a W-2 employee) but as a statutory SECA tax employee for Social Security and Medicare purposes (and thus an “eligible self-employed individual” for purposes of the credit). The church is paying the minister’s salary and, if the minister qualifies for COVID-19 related sick or family leave, some portion of the wages paid to the minister by the church can qualify for the credit. But it is the minister, and not the church, who will get the benefit of the credit. The church and the minister can perhaps work out an arrangement so that the credit used to pay the minister’s taxes is in some way paid to the church, but this is a complication not present for other employees (unless they too happen to be treated as “statutory self-employed individuals” under SECA). This is probably an unintended result, but it is one that would appear to require a technical correction to the legislative text in order to change it.
Two additional issues not explicitly addressed in the guidance merit consideration.
First, paid leave is required only if an employee is unable to work, or telework, due to the situations discussed above. If an employee is teleworking, he or she is not on leave, and the payroll costs associated with that work are not recoverable. Accordingly, it is important for employers to track whether teleworking staff are actually “at work” or “on leave” for a coronavirus-related reason. Only costs associated with paid leave time are creditable.
And second, the regulatory guidance does not discuss whether tax credits are available when employees work partial days. In a household with two wage earners, for example, each might take a half-day off to care for children. If each receives a half-day of paid coronavirus-related leave, each of their employers presumably may take a credit for those half-day paid leave costs.
A caution regarding exempt workers
Under the Fair Labor Standards Act, a worker is exempt only if, among other things, he or she is paid on a salary basis. Using leave pay to compensate an exempt employee for a partial day’s absence jeopardizes the exempt status. However, deductions from pay may be made for sickness-related absences of one or more full days without jeopardizing exempt status if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by sickness.
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