Many employers are asking the question: “How can I fund the salaries I must pay to my employees who elect to take sick or medical or family leave under the Families First Coronavirus Response Act?” It’s a good question because the FFCRA provides two weeks of sick leave at 100% of an employee’s wages plus an additional up to 10 weeks at two-thirds pay in some cases.
Using PPP loan proceeds may be a first thought, but to the extent the proceeds are used to pay those wages, those proceeds will not be forgiven. So, the employer will carry a loan balance at 1% as a result. While these will probably be the best loan terms a business will ever get, it may not be the best choice.
An alternative is that an employer can fund the wages out of the deposits the employer is otherwise required to make with the IRS for compensation it pays to all of its employees. The CARES Act permits an employer to retain (and not deposit with the IRS) all federal employment taxes equal to the paid sick wages, plus allocable health plan expenses and employer’s share of Medicare tax. This includes the amounts the employer is required to withhold on behalf employees. And, if the deposits are not sufficient to fund the wages, the employer can apply for an advance from the IRS. This is not a loan and would not have to be repaid. So if the employer believes it will have sufficient deposits to fund the wages, it should elect to access the deposits rather than use PPP loan proceeds.