The Families First Coronavirus Response Act (FFCRA) requires businesses with fewer than 500 employees to provide 2 weeks of paid sick leave to employees who contract COVID-19. The employer then receives a tax credit for those wages paid.
Other nuggets about the leave:
- The credit is wages paid PLUS employer-side Medicare tax.
- The employer does not owe employer-side Social Security tax on these wages; this isn’t a credit or a deferral — employer SS tax is simply not owed
Many businesses have received Paycheck Protection Program loans. It is fine to have a PPP and claim the credits under the FFCRA; however any wages claimed toward the FFCRA credit cannot be claimed for PPP forgiveness.
Example: your business pays $2,000 of COVID-related leave to an employee. You qualify for a credit on these wages; and let’s say you also received a PPP loan. You cannot claim these $2,000 of wages toward PPP forgiveness because you’re claiming the credit on those wages.
The question people ask me is, can I choose not to claim the credit, and instead claim those wages toward PPP forgiveness? And if I do that, can I still take advantage of no employer-side Social Security tax being owed on those wages?
So here’s the answer, which blows this strategy out of the water (but that may not be a bad thing).
See Section 1102(2)(36)(A)(vii)(I)(dd) and (ee) — (that’s quite a monster of a citation, by the way) — of the CARES Act, which covers payroll costs eligible for forgiveness under PPP.
Eligible payroll costs for PPP forgiveness do NOT include:
(dd) qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or
(ee) qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127);
Note the usage of the term “is allowed.” If you pay wages under the FFCRA, the credit “is allowed.” If you choose not to take the credit, it doesn’t open up PPP forgiveness for you, because you could take the credit; it is “allowed.”
This renders the question about employer-side Social Security tax moot. You could I suppose choose not to claim the FFCRA credit but still take advantage of not paying ER-side SS tax. But again it wouldn’t open up PPP forgiveness.
Why Would You Want to Do This Anyway?
So the answer is, no, you cannot choose not to claim the FFCRA credits and instead claim those wages toward PPP forgiveness. The bigger question I have is: why would you want to do that anyway?
Let’s say an employee contracts COVID-19, and you pay them their regular wage for 2 weeks of FFCRA leave. Let’s say their wages are $2,000 during those 2 weeks.
Your tax credit is: $2,000 wages paid plus the employer-side Medicare tax ($2,000 x .0145 = $29). So that’s $2,029 of tax credit. You also don’t owe employer-side Social Security tax, which saves you another $124. The $2,029 credit offsets your payroll tax deposits and can be partially refundable.
I get wanting to maximize PPP forgiveness, but why on earth would you not claim the credit?
Let’s say our sample employer here also has a PPP loan. The $2,000 of wages paid under the FFCRA don’t count toward forgiveness, and let’s just say this results in $2,000 being left on the PPP loan (in particular on 24-week forgiveness, and also if there are other PPP-eligible costs [rent, utilities], the exclusion of these wages may be a moot point for PPP forgiveness anyway; it might all be forgiven just with other eligible costs.)
A PPP loan is repayable over 2 years or 5 years (depending on when the money was received) at 1% interest. At a 2-year payback, you’re paying $84.20 per month; on a 5-year payback it’s $34.19 per month.
I get not wanting debt, but why would you forgo $2,029 in tax credits now (some of which will be direct cash in your pocket coming back from the IRS) for the sake of counting those wages toward PPP? It doesn’t make sense to me, but I get this question every time I present on this topic.