Under the American Rescue Plan Act of 2021 (ARP), new tax credits are being provided for paid leave to employees who take time off related to COVID-19. The ARP allows small and medium-sized employers, and certain governmental employers, to claim refundable payroll tax credits equal to 100% of the qualified sick leave. Eligible employers that are entitled to claim the refundable tax credits include businesses and tax-exempt organizations with fewer than 500 employees and pay qualified sick leave wages. Self-employed individuals are eligible for similar tax credits.
Qualified sick leave includes wages for an employee who is directly affected, experiencing symptoms, and seeking a medical diagnosis for COVID-19 as well as employees in the process of obtaining or recovering from the effects of any COVID-19 vaccination. The credit is allowed for up to 80 hours of paid sick leave in an amount equal to the employee’s regular wage, capped at $511 per day for a total of 10 workdays, for a total cap of up to $5,110.
Businesses and nonprofits will be eligible to claim the tax credits available to eligible employers that pay sick and family leave from April 1, 2021 through September 30, 2021. The Emergency Paid Sick Leave Act allows employers to reclaim the original credit as written under the Families First Coronavirus Response Act from its enactment up to March 31st, 2021. Employers can claim the credit again from April 1st, 2021 to September 30, 2021 for another 10 days on the same employee if needed.
Eligible employers claiming the credits for qualified leave wages must retain records and documentation related to and supporting each employee’s leave. Credits can be claimed on Form 941, Employer’s Quarterly Federal Tax Return. Eligible employers can keep the federal employment taxes that they otherwise would have deposited, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the eligible employer’s share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If the eligible employer does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, the eligible employer may request an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Self-employed individuals may claim comparable credits on the Form 1040, U.S. Individual Income Tax Return. The credit will be based on the net earnings during the year divided by 260 days to determine the credit limitations. The ARP increased the day limitation to 60 days ($12,000 overall; $200 per day).
More Information
- IRS: Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations
- IRS: American Rescue Plan tax credits available to small employers to provide paid leave to employees receiving COVID-19 vaccines; new fact sheet outlines details
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