The American Rescue Plan’s Paid Leave Tax Credits

The American Rescue Plan Act (ARPA) entitles certain employers to tax credits when eligible employers give their employees paid leave related to COVID-19 vaccinations. On April 21, 2021, the IRS issued a fact sheet FS-2021-09 explaining how small, midsize and certain governmental employers can claim the refundable tax credits.

Employers with fewer than 500 employees are eligible for the refundable tax credits.

The ARPA allows any business under the 500 employee threshold to claim the paid leave tax credits. The fact sheet explains that self-employed individuals, private companies, tax-exempt organizations and governmental employers are eligible employers. The IRS specified that the definition of eligible employers does not include governmental employers such as the federal government and any agency or instrumentality of the federal government.

The fact sheet describes the type of paid sick and family leave that qualifies for the tax credit.

Eligible employers may claim a tax credit for wages paid for leave taken by employees who cannot work or telework due to reasons related to COVID-19. The COVID-19 related leave reasons include leave taken to receive a COVID vaccination or recover from any COVID vaccine-related injury, disability, illness or condition. Eligible employers are entitled to these leave tax credits from April 1, 2021, through September 30, 2021.

FS-2021-09 explains how eligible employers claim the tax credit.

As the fact sheet explains, the paid leave credits are tax credits against an eligible employer’s share of the Medicare taxes. The tax credits are refundable, so an eligible employer is entitled to pay the total amount of the credits if the credit exceeds their share of the Medicare tax. Eligible employers should report their total paid sick and family leave wages as a credit on their quarterly federal employment tax return, usually Form 941, Employer’s Quarterly Federal Tax Return. The Form 941 instructions explain how to reflect the reduced federal tax liabilities for the quarter related to the deposit schedule. In general, those eligible employers that plan to claim the credits on Form 941 may retain any federal employment taxes that they otherwise would have deposited, up to the total amount of credit for which they are eligible. Eligible employers may request an advance of the tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19 if the amount of federal employment taxes are less than the amount of paid leave credits they can claim. Self-employed individuals may claim comparable tax credits on their individual Form 1040, U.S. Individual Income Tax Return.

Eligible employers can claim the credit up to the maximum allowable amounts.

The tax credit paid for personal sick leave related to the COVID vaccine equals the sick leave wages paid for COVID-19 related reasons. The sick leave provides up to 80 hours of paid leave at the employee’s regular pay rate, limited to $511 per day and $5,110 in the aggregate. The tax credit for paid family leave equals the family leave wages paid for up to 12 weeks, limited to $200 per day and $12,000 in the aggregate, at two-thirds of the employee’s regular pay rate.

Before making any changes or claiming the tax credits, employers should consult with their payroll administrator, tax professionals, and employment lawyer. For information about the tax credits, employers should visit the IRS Fact Sheet.

In case you missed it, see our return-to-office client panel webinar materials, tools and resources here: Way to Wellness: Return-to-Office Protocols & Considerations

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