Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.
Question: We paid Covid-related sick and family leave to some of our employees. How is this reported on Form W-2?
Answer: Under the Families First Coronavirus Response Act, some employers are required to provide employees with sick- and family-leave wages. The law allows employees up to 80 hours of paid sick time and up to 10 weeks of paid family-leave time when they are unable to work for certain reasons related to the coronavirus.
These wages are subject to income tax withholding and employee Social Security and Medicare taxes, but, in most cases, are exempt from employer Social Security taxes.
In most cases, employers subject to the paid-leave rules are entitled to fully refundable tax credits to cover the cost of the leave. Certain self-employed persons in similar circumstances are entitled to similar credits. Notably, governmental employers who are subject to the leave requirements are not entitled to the tax credits.
For the purposes of Form W-2, Wage and Tax Statement, wages are reported just as any other wages would be reported. Amounts paid for sick and family leave are included as wages in Boxes 1, 3, and 5, except amounts that exceed the Social Security wage base, and the amounts of taxes withheld in Boxes 2, 4, and 6. The amounts should be included in state and local Boxes 15 to 20 as appropriate.
Self-employed individuals are also entitled to a refundable credit against income tax on self-employment income for qualified sick and family leave equivalent amounts. However, where a self-employed individual also receives qualified sick- or family-leave wages as an employee, the self-employed equivalent amount is reduced.
The amount of the reduction is the excess of the sum of the qualified sick- and family-leave wages and self-employed equivalent amounts over the maximum qualified wages. For example, the maximum for sick-leave wages is $2,000 at the rate of $200 a day, or $511 a day up to 10 days for days the sick leave is paid for reasons that qualify for the $511 per-day rate. The maximum for family leave is $10,000 for 10 weeks at up to $200 a day.
This means that to accurately calculate the amount of credit the self-employed individual is entitled to claim, the individual has to know the amount and type of any qualified wages that an employer included in W-2 wages.
Self-employed individuals who also receive wages or other compensation as employees need information from their employers in order to properly claim any qualified sick or family leave equivalent credits. To be sure they, and the IRS, have that information, the IRS requires employers to report separately the total amounts of any $511 per day qualified sick leave wages, $200 per day qualified sick leave wages, and qualified family leave wages paid to each employee.
Under Internal Revenue Service Notice 2020-54, employers are required to separately state the qualified wage amounts on Form W-2 in Box 14 or in a separate statement. The notice also specifies the labeling to be used to report the amounts.
If a separate statement is used and the employee is furnished a paper W-2, the statement must be included with Form W-2. If the W-2 is furnished electronically to the employee, the statement must be provided in the same manner and at the same time as the electronic W-2. The notice provides the following sample wording for a separate statement:
“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.”
By Patrick Haggerty
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