Form 941, Qualified sick leave wages and SS Limits

[tmesp]

I have a question regarding qualified sick leave wages, Social Security wage limits, and the new Form 941.

I have a client who has an employee who received qualified sick leave wages in the second quarter.  My understanding is that these wages are taxable to the employee but not the employer. In the third quarter the employee hit the SS max of $137,700.  

I think the employer owes more than the employee does in the third quarter and I am not sure how to report that on the 941.  Have I overlooked something obvious?

As an example:

Employee makes $50k/quarter. During the second quarter the employee was paid $5k in qualified sick leave.  At the end of the second quarter that employee would have $100k social security wages, but the employer would have only "matched" $95k.  In the third quarter the employee would pay on $37.7k and I think the employer should pay on $42.7k.

Your thoughts would be appreciated.

[qbteachmt]

"My understanding is that these wages are taxable to the employee but not the employer."

What is your reference for that?

You did not state this is third-party sick pay, or was paid under an insurance plan and if so, who paid the premiums for the leave? If this is "sick pay" not under either of those conditions, it's taxable compensation as usual.

[tmesp]

The wages paid are Qualified sick leave wages paid under the Emergency Paid Sick Leave Act (EPSLA).

My basis for the taxability of these wages was inferred from the Instructions for Form 941 (Rev. 7-2020), which states, on page 9, for line 5a(i) "Qualified sick leave wages aren't subject to the employer share of social security tax; therefore, the tax rate on these wages is 6.2% (0.062).".  I inferred from this line that the wages were still taxable to the employee.

[qbteachmt]

The 941 Instructions have the description for handling adjustments and where not to enter specifically "qualified sick leave wages" . Example: they are reported on Line 5a(i) and not 5a. It includes this: "For 2020, the rate of social security tax on taxable wages, except for qualified sick leave wages and qualified family leave wages, is 6.2% (0.062) each for the employer and employee or 12.4% (0.124) for both. Stop paying social security tax on and entering an employee's wages on line 5a when the employee's taxable wages, including qualified sick leave wages, qualified family leave wages, and tips, reach $137,700 for the year."

[tmesp]

My issue is that the qualifying sick leave wages were paid in the second quarter, and I am not sure how or what I should report in the third quarter.  The second quarter sick pay, I think, creates a difference between the employee and employer taxable wages going into the third quarter.  

941 - from my earlier example

                2nd qtr                      3rd qtr

5a          45,000                        ????

5a(i)         5,000                        -----

[qbteachmt]

"and I am not sure how or what I should report in the third quarter"

You report the third quarter as is. The employer doesn't "skip" the sick pay; it is inclusive for purposes of YTD, so the third quarter is $37.7k for each of them.

[tmesp]

I'm not trying to be obtuse but trying to understand.  Given my example of $5k paid for sick leave paid before the SS cap was reached, the employer would only match on $132,700 of wages for the year?

If the qualified wages were paid after the SS cap was reached, the employer would have already matched $137,700.  Would the employer be eligible for a credit/refund or just be out the difference?

[qbteachmt]

Thinking of this as a "match" would the error. Let's examine what it really is: A Tax on the wage amount. The Employer pays a tax and the employee pays a tax. In 2011 there was a Payroll Tax Holiday to stimulate the economy, resulting in the Employee rate being reduced to 4.2%. You likely heard on the news, "This will put $1,000 in your pocket" because they based this on the average annual wage being $50,000. So, clearly, it's not a Match process. it's a Tax Rate process.

Next, go here:

https://www.irs.gov/newsroom/covid-19-related-tax-credits-general-information-faqs

and then here:

https://www.irs.gov/newsroom/new-credits-fund-employers-for-coronavirus-related-paid-leave

There you see: "The eligible employer is entitled to a fully refundable tax credit equal to the required paid sick leave wages. Eligible employers can also get an additional credit for the employer's share of Medicare tax imposed on the qualfied sick leave wages and the cost of maintaining health insurance coverage for the employee during the sick leave period. The employer is not subject to the employer portion of Social Security tax on those wages."

And keep in mind that the payroll tax provision put in place for CARES/FFCRA include that the Employer is the impacted party, and the Employer is getting financial considerations and benefits. And the Sick Pay still is part of the YTD, and not overlooked. That means the employer is to "Stop paying social security tax on and entering an employee's wages on line 5a when the employee's taxable wages, including qualified sick leave wages, qualified family leave wages, and tips, reach $137,700 for the year."

Don't think beyond the quarter you are working on. The Employee in your example has the remaining wage limit of $37.7k, all of which is earned taxable wages in that quarter.

[DRS817]

tmesp,

I'd love to know how you handled this situation, as I have the very same thing.  Employee received qualified sick leave wages in Q2 (NPL) and has now reached the $137,700 SS wage limit in Q4.  I'm not sure what to do with the variance in wages x .062 that was calculated for Q4.

How did you handle it on the Form 941? 

[qbteachmt]

"I'm not sure what to do with the variance in wages"

Are you using the right form 941?

Look here, including FAQ for Recent Developments:

https://www.irs.gov/forms-pubs/about-form-941

[qbteachmt]

I found another site for FAQ:

https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-...

[thebandit23]

Are qualified sick leave wages wages that can just be paid by the employer while the employee is home sick with Covid, or do the wages have to be provided through a third-party sick leave company?

For example, if I were to keep paying my employee even though they are home sick with Covid, can I claim the credit, or does it have to be provided through an official third-party sick pay provider?

[DRS817]

You can pay them utilizing the Family and Medical Leave Act (FMLA) You will need to look at the documentation for this from the IRS's website.  There are different ways it is paid based upon the status of the employee.  Meaning in your case they are actually sick with COVID and staying home, away from work due to the illness.  The wages do not need to be paid by a third party to get to take the tax deduction amount but you do need to look at the documentation to see how to pay the wages (i.e. how they need to be listed on their paycheck and then on thei W-2).