Key Points

• Small employers (with fewer than 500 employees) and governmental employers who are required to provide employees with paid sick and expanded family leave related to COVID-19 are required to report the amounts paid on Form W-2.
• IRS guidance provides information about how to report paid leave on employees’ Forms W-2.
• Employers may provide additional information to alert self-employed individuals to limits on tax credits for the paid leaves using an IRS model statement.

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The IRS recently issued Notice 2020-54 that provides instructions to employers on how to report the amount of paid sick leave wages and expanded family leave wages paid to employees under the Families First Coronavirus Response Act ("FFCRA"). FFCRA generally requires employers with fewer than 500 employees and governmental employers to provide paid leave to employees who are unable to work due to certain circumstances associated with COVID-19. The FFCRA paid leave requirements are subject to time (hours or weeks) and dollar caps, depending on the reason for the leave. See our discussion of the required leave payments in Employer Notice: Families First Coronavirus Response Act Becomes Law (3/19/2020).

Generally, private sector employers subject to the FFCRA paid leave requirements are entitled to refundable tax credits against employment taxes to cover the cost of the leave. FFCRA also entitles a self-employed individual to a refundable credit against self-employment income tax for equivalent amounts of paid sick leave and family leave. If an individual is entitled to sick leave as an employee for which tax credits are available to the employer and to a refundable credit on self-employment income for equivalent amounts, FFCRA requires that the self-employed tax credits be reduced such that the sum of the two types of credit is no more than the maximum amount of paid leave wages that could be received as an employee.

The IRS guidance on the new reporting requirements is intended to assist self-employed individuals who also receive compensation as an employee to properly claim tax credits. However Notice 2020-54 requires all employers, whether or not they employ individuals who may also have self-employment income, to report the amount of FFCRA-required sick leave and expanded family leave wages paid to employees in 2020.

Reporting FFCRA-Required Sick Leave and Family Leave Wages Paid on Form W-2

The employer must report any FFCRA-required sick leave wages and expanded family leave wages paid to an employee in the amount of wages reported in Boxes 1, 3 (up to the Social Security wage base) and 5 of Form W-2. In addition, the employer must report to each employee the separate type and amount of wages that were paid, either in Box 14 of Form W-2 or on a separate statement provided to employees. This reporting must identify, using specific language included in the guidance, the total amount of wages paid for each type of sick leave or expanded family leave, depending on the underlying reason for the leave and the associated dollar cap.

If a separate statement is provided and the employee receives a paper Form W-2, the statement must be included with the Form W-2. If the Form W-2 is provided electronically, then the statement must be provided at the same time and in the same manner as the Form W-2.

Model Language for Alerting Self-Employed to Limits

Under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about the FFCRA-required sick leave and family leave wages paid to the employee and explain that receiving these wages may limit the amount of equivalent credits to which the employee may be entitled with respect to any self-employment income. The IRS guidance provides model language for this purpose.

If you have questions, please reach out to your contact in the Hanson Bridgett Employee Benefits Group.