IRS: Employers Can Retain Payroll Taxes to Pay for COVID-19 Leave

IRS Alabama Employment Law COVID-19 Paid Leave
The IRS will allow employers to retain their payroll taxes to pay for leave associated with COVID-19.

The Internal Revenue Service will allow employers to retain their payroll taxes to pay for newly-mandated leave associated with COVID-19.  In a press release on March 20, 2020, the IRS provides some preliminary guidance that may ease the fears of many small employers.  Here’s a link to that press release:  IRS Press Release

I’ve received a lot of questions about the Families First Coronavirus Response Act.  Here’s a blog that I wrote generally discussing the requirements of that act:  Coronavirus Response Act.  Broadly, the Act requires many small employers to provide paid leave for child care and other issues associated with COVID-19.   Many of my clients are concerned that the cost of paid leave will be so great they will be out of business before being able to claim a tax credit.  The IRS’s press release addresses those concerns.

Importantly, the press release is not a valid and/or final statement of the IRS’s interpretation of the Act.  It plainly states that a formal guidance should be released this week.  Nevertheless, the press release should relieve some employers’ fears. The IRS says that employers will be able to immediately pay for the leave by retaining their federally-mandated payroll taxes:

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.

Obviously, I will provide an update when the official guidance is released this week.