Coronavirus-related tax changes that will affect many Americans and many businesses are already on the table or about to be served up. As this column was written, Congress was working on a huge new coronavirus relief bill that will surely include a massive economic stimulus package, and probably lots of tax changes too.
Here, I’ll cover coronavirus-related tax changes that are already baked in the cake: Friday’s announcement from Treasury Secretary Steven Mnuchin and a new law that was enacted Wednesday.
The April 15 tax-return filing deadline was deferred three months
In my last column, I explained that federal income-tax payments that would otherwise be due on April 15 can be deferred until July 15 with no interest or penalties.
As predicted, Mnuchin announced Friday on Twitter that federal income tax returns that would otherwise be due on April 15 can be put on hold until July 15 without taxpayers having to submit extension requests to the Internal Revenue Service. This development clearly applies to individual taxpayers and probably to trusts, estates, and corporations that use the calendar year for tax purposes too. Time will tell.
We don’t yet know if filing deadlines for federal payroll tax returns and federal estate- and gift tax returns will also be delayed. We also don’t yet know if the normal April 15 deadline for making IRA and health savings account (HSA) contributions for your 2019 tax year will be delayed. Time will tell.
The Families First Coronavirus Response Act affects small businesses and their employees — and includes employer tax breaks
President Trump on Wednesday signed into law the Families First Coronavirus Response Act, the initial coronavirus relief bill. The new law requires small employers — those with fewer than 500 employees — to provide limited paid-leave benefits to employees who are affected by the coronavirus emergency. Small employers are given new tax credits and federal payroll-tax relief to pay for the new mandatory benefits.
Mandatory employee paid leave
The Act requires emergency paid sick leave. It is limited to $511 per day for up to 10 days (up to $5,110 in total) for an eligible employee in coronavirus quarantine or seeking a coronavirus diagnosis. An employee can also receive emergency paid sick leave of up to $200 per day for up to 10 days (up to $2,000 in total) to care for a quarantined family member or a child whose school or child-care location has been closed due to the pandemic.
The Act also requires that small-business employees be given the right to take up to 12 weeks of job protected family leave if the employee or a family member is in coronavirus quarantine or if the school or child-care location of the employee’s child is closed due to the coronavirus. The employer must pay at least two-thirds of the employee’s usual pay, up to a maximum of $200 per day, subject to an overall per-employee maximum of $10,000 in total family-leave payments.
Small-employer tax credits
The Act grants a new tax credit to small employers to cover the now-required payments to employees who take time off under the new law’s emergency sick-leave and family-leave provisions.
Specifically, a small employer can collect a tax credit equal to 100% of qualified emergency sick-leave and family-leave payments made by the employer pursuant to the Act. However, the credit only covers leave payments made during the period beginning on a date specified by the Secretary of the Treasury and ending Dec. 31, 2020. The beginning date will be within 15 days of the March 18 date the Act became law.
The credit is increased to cover a portion of an employer’s qualified health-plan expenses that are allocable to emergency sick-leave and family-leave wages.
The new credit is first used to offset the Social Security tax component of the employer’s federal payroll-tax bill. Any excess credit is refundable, meaning the government will issue a payment to the employer for the excess.
Warning: The credit is not available to employers that are already receiving the pre-existing credit for paid family and medical leave under Internal Revenue Code Section 45S. Small-employer FICA tax relief
Sick-leave and family-leave payments mandated by the Act are exempt from the 6.2% Social Security tax component of the employer’s federal payroll tax that normally applies to wages. Employers must pay the 1.45% Medicare tax component of the federal payroll tax, but they can claim a credit for that outlay.
Comparable tax credits for self-employed individuals
If you are a self-employed individual who is affected by the coronavirus emergency, the Act allows you to claim a refundable credit against your federal income-tax bill, including the self-employment tax hit. If the credit exceeds your bill, the government will issue you a payment for the excess.
The credit equals: 1) 100% of the self-employed person’s sick-leave equivalent amount plus 2) 67% of the sick-leave equivalent amount for taking care of a sick family member or taking care of your child following the closing of the child’s school.
The sick-leave equivalent amount equals the lesser of: 1) your average daily self employment (SE) income or 2) $511 per day for up to 10 days (up to $5,110 in total) to care for yourself due to the coronavirus or $200 per day for up to 10 days (up to $2,000 in total) to care for a sick family member or your child following the closing of the child’s school due to the coronavirus.
In addition, you could claim a coronavirus emergency family-leave credit for up to 50 days. The credit amount would equal the number of qualified family-leave days multiplied by the lesser of 1) $200 or 2) your average daily SE income. The maximum total family-leave credit would be $10,000 (50 days times $200 per day).
These credits for self-employed individuals are only allowed for days during the period beginning on a date specified by the Secretary of the Treasury and ending on Dec. 31, 2020. The beginning date will be within 15 days of the March 18 date the Act became law.
Warning: To properly claim the credits, self-employed individuals must maintain whatever documentation the IRS requires in future guidance. Your tax professional can help with that.
The bottom line
Folks, we may see almost daily developments on the coronavirus-related tax front. We will do our best to keep you informed. So stay tuned — and be careful out there.