IRS and Treasury Offer Guidance on Reporting Sick and Family Leave in Coronavirus Relief

The COVID-19 pandemic put a lot of stress and pressure on businesses, employees, and finances. While a variety of laws have been passed to address the challenges, many business leaders were left seeking clarity on how these laws would impact them.

One of these laws, the Families First Coronavirus Response Act, was meant to provide free coronavirus testing, 14-day paid leave for American workers affected by the pandemic, and increased funding for food stamps. It also allowed employers the opportunity to have these distributions refunded in the form of a credit.

But understandably, employers had questions—especially as it pertains to the reporting of paid leave. In turn, new guidance sought to offer clarity. Notice 2020-54, Guidance on Reporting Qualified Sick Leave Wages and Qualified Family Leave Wages Paid Pursuant to the Families First Coronavirus Response Act, was issued by the IRS and Treasury to help employers understand how to report this paid leave.

Basics of the Families First Act

The Families First Act generally requires employers with fewer than 500 employees to provide paid leave due to certain circumstances related to the Coronavirus Disease 2019 (COVID-19). It also offers employers a path to having these funds refunded in the form of tax credits.

Expanded Leave

For eligible employers with fewer than 500 employees, this is done through two separate provisions: the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act.

Emergency Paid Sick Leave Act: Requires certain employers to provide employees with up to 80 hours of paid sick leave if the employee is unable to work or telework in certain circumstances including:
- When the worker is subject to Federal, State, or Local Quarantine
- Has been advised to self quarantine.
- Is experiencing symptoms of COVID-19
- Is caring for an individual subject to quarantine.
- Has children whose school or place of care has been closed.
Emergency Family and Medical Leave Expansion Act (EFMLEA): Provides expanded paid family and medical leave to employees who are unable to work or telework for reasons related to COVID-19. This allows employees to receive up to ten weeks of paid leave at two thirds the regular rate of pay.

Refundable Credits

Sections 7001 and 7003 of the Families First Act generally provide that employers subject to the paid leave requirements under EPSLA and EFMLEA (“eligible employers”) are entitled to fully refundable tax credits to cover the cost of the leave required to be paid for those periods of time during which employees are unable to work or telework for reasons related to COVID-19.

This credit can be used against Social Security and Medicare (payroll) taxes and on all wages and compensation paid to all employees. The refundable credits authorized under the Families First Act apply to qualified sick leave wages and qualified family leave wages paid with respect to the period beginning on April 1, 2020 and ending on December 31, 2020.

For more information on the law and the update, view Notice 2020-54 in full.

Notice 2020-54 Clarifies Reporting

Now, with the background out of the way, the reporting requirements are reasonably simple.

Reporting Paid Leave on W-2, Box 14

As discussed in an Accounting Today article, “employers will be required to report these amounts either on Form W-2, Box 14, or in a statement provided with the Form W-2.”

Further information on how to provide partially self-employed individuals who receive wages is discussed in Section III of the update.

Recommended Language for Employee Communication in W2, Box 14

Additionally, the IRS and Treasury notice offers recommendations on how to communicate this to employees:

“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.”

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