Under the American Rescue Plan Act of 2021 (ARP), small and midsize employers and certain governmental employers are allowed to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19 illnesses and vaccinations. This includes leave taken by employees to receive or recover from the COVID-19 vaccination, or to care for family members who take the vaccine. This credit is available to eligible employers who paid for employee’s leave taken between April 1, 2021, and September 30, 2021.
Who are eligible employers?
Eligible employers are businesses (including tax-exempt organizations) with fewer than 500 employees. Governmental employers, other than the federal government, are also considered to be eligible employers. In addition, there is a similar tax credit for self-employed individuals.
What kind of leave counts towards the credit?
Employers are allowed to take the tax credit for sick wages paid to employees who are not able work or telework due to COVID-19 related illnesses (includes receiving or recovering from COVID-19 vaccines). Employers are also allowed to take the tax credit for family leave wages paid to employees who missed work to care for their family members suffering from COVID-19 related illnesses (includes receiving or recovering from COVID-19 vaccines). These tax credits are only available for above said wages paid between April 1, 2021, and September 30, 2021.
What are the tax credit amounts and limits?
Under the ARP, the paid leave credits are refundable tax credits against the employer’s share of the Medicare tax. The refundable credit allows the employer to receive a payment of the full amount of the credit, even if it exceeds the employer’s share of the Medicare tax.
For sick leave wages, the tax credit is equal to 100% of the sick leave wages paid to the employee (for COVID-19 related reasons as mentioned above) capped at two weeks (or 80 hours) of pay and limited to $511 per day or $5,110 total.
For family leave wages, the tax credit is equal to 66.67% of wages paid to the employee (for COVID-19 related reasons as mentioned above), limited to $200 per day or $12,000 total and capped at 12 weeks.
The amount of the tax credit is increased by allocable health plan expenses, employer’s share of Social Security and Medicare taxes paid on the wages. However, the total amount of the credit is still subject to the daily and total caps listed above.
How do I claim the credit?
Employers report their total paid sick and family wages, eligible health plan expenses and collectively bargained contributions, and employer’s share of Social Security and Medicare taxes on the paid leave wages for each quarter on their federal unemployment tax return (Form 941, Employer’s Quarterly Federal Tax Return).
If employers think they are eligible to claim the credit, they can keep the federal employment taxes they otherwise would have deposited.
If the employer does not have enough federal employment taxes set aside to cover amounts provided as paid sick and family leave wages, the employer can request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The employer will then account for the amounts received as an advance when they file Form 941, Employer’s Federal Tax Return, for the relevant quarter.
Contact us if you would like more help in determining what leave qualifies for the tax credit or if you have questions about it.