Congress passed the Family First Act and president Trump signed it into law on Wednesday, March 18th with good intentions of providing emergency relief to those negatively impacted the most by the COVID-19 pandemic. Unfortunately, however, there is one fatal flaw in this relief measure that may result in the exact opposite outcomes than what legislators were intending to prevent in the first place. Let me try to explain in simple terms with a straight-forward example.
Family First Act Payroll Relief Provisions
In order to demonstrate how this might play out, it’s important to first lay the groundwork for how the provisions work for payroll purposes. Under the Family First Act, employers of a certain size are required to make payments to affected employees within certain parameters set forth by the law. Without getting too far into the weeds, it means that if you are a small business owner with employees who are negatively impacted by COVID-19 (which could be all of your employees, depending on your industry, location and other factors) then you will have to pay them some wages based off a formula specific to their facts and circumstances. The nice thing about this mandate is that the wages you pay to the employees covered by this act are fully refundable to you as a tax credit. To put it simply, you will be made whole on the payments you make to affected employees at some point in time. The critical issue here, however, is the timing of when you will be reimbursed for these payments via the tax credits afforded to you. For small business owners who have limited cash on hand, this could be disastrous, which I will explain in the example below.
The Flaw in the Family First Act
Say you are the owner of a dine-in restaurant whose employees are unable to work due to the COVID-19 pandemic and all of these employees qualify for payments under the provisions outlined in the Family First Act (which is actually feasible given the ambiguity in who would qualify under the law). If these employees are still employed after 4/02/2020 when the law is passed, they are eligible for some wage payments and you are eligible for a tax credit on those wage payments that you make. In the end, it’s a zero sum game in that you as the business owner pay your employees their gross wages and then get a tax credit for those wages at a later point in time. However, the issue arises if you have gross wages that exceed the amount of taxes required to be remitted. If this is the case, which very well could happen to business owners in the restaurant industry, then you will run into a situation where you’re forced to pay wages today and won’t get reimbursed for them until 90 days later (or more). Due to the state of our current crisis, many small business owners cannot afford to wait 90 days or more to receive their refund without becoming insolvent. Here is a practical example of how this could play out:
Gross Wages to Employees Eligible for Paid Sick Leave: $10,000
Taxes Related to Gross Wages (Eligible for Immediate Credit): $2,500
Short Term Cash Flow Shortage: -$7,500
Cash Flow from Tax Refund (90 days later): $7,500
Net Impact: $0
The above example is oversimplified, but it illustrates the issue regardless of whether or not the figures represented are completely accurate. In the scenario above, a small business owner is short $7,500 for a period of up to 90 days (or more) before they see a refund when they file their federal 941 form at the end of the quarter. As you can see, this creates a cash shortfall of $7,500 for an extended period of time when the business owner needs it the most, which may cause many businesses to shut their doors sooner than later. What will likely happen as a response to this is that employers will downsize their labor force, possibly by targeting those who are eligible for payments under the act, which is the exact opposite of what the bill intended to do. There is some information out there that suggests the IRS is working to provide an expedited refund for companies impacted by the scenario above (with 2 weeks being floated around) but given the current state of affairs and timeliness of responses from the IRS as of late, I am not confident that this can be executed on in an expedient manner during a time when business owners need it the most.
I won’t pretend to have a perfect solution to all of this, but I do worry that for certain industries it will be easier for employers to layoff employees covered under the Family First Act than it will be to try to juggle the cash flow timing differences they may face as a result of this.