Large employers ineligible for the payroll tax credits enacted by Congress in response to the coronavirus pandemic have another option for 2020.
The section 45S credit created by the Tax Cuts and Jobs Act, which isn’t limited by employer size, is an option that some employers may have forgotten about, Veena K. Murthy of Crowe LLP told Tax Notes March 23.
“It’s not as generous. It works differently. But it’s out there for any huge company,” Murthy said.
Section 45S provides a credit to employers that provide paid family and medical leave that’s equal to a percentage of wages paid to qualifying employees. The credit was initially available only in 2018 and 2019, but it was extended through 2020. Murthy said it’s likely to be extended further.
Murthy also said it’s important for employers to remember that to use the section 45S credit, they must have a written policy in place.
The Families First Coronavirus Response Act (P.L. 116-127), signed into law March 18, provides payroll tax credits for employers providing paid sick and family and medical leave. However, the payroll tax credits are available only to private employers with fewer than 500 employees.
Murthy noted that while the section 45S credit doesn’t have a cap on the number of employees an employer can have, it imposes a $75,000 compensation limit for qualifying employees.
Labor Laws
Under the coronavirus legislation, practitioners must look at labor law definitions to determine the 500-employee threshold. Those definitions aren’t the same as the controlled group rules for tax purposes, Murthy said.
However, Murthy said the tax credit itself will presumably be paid based on tax rules. The IRS said in a March 20 release that guidance on the payroll tax credits would be released the week of March 23, and Murthy said that guidance should help coordinate the different rules.
Ellison F. McCoy of Jackson Lewis PC said on a March 23 webinar hosted by his firm that many clients have asked whether employees of subsidiaries will be counted for purposes of the 500-employee threshold.
For purposes of the paid sick leave, McCoy said employers must look to the Fair Labor Standards Act, which uses the so-called single enterprise test to determine whether a subsidiary’s employees should be included. He said that under that test, subsidiary employees would be included if the entities engage in related activities, have unified operations or common control, and have a common business purpose.
For the family and medical leave expansion under the coronavirus bill, employers must look to the Family and Medical Leave Act’s integrated employer test to determine whether subsidiary employees are included, McCoy said.
Employers should be wary of trying to combine entities to exceed the 500-employee threshold if they have structured entities separately for tax purposes, McCoy said. “That could potentially be used against you,” he said.