The American Rescue Plan Act of 2021 (Act) enacted in March contained many tax provisions, including a payroll tax credit for COVID-related paid leave provided to employees in 2021. These paid leave provisions build upon the paid sick leave and paid family leave rules applicable to 2020 under the Families First Coronavirus Response Act (FFCRA).
The FFCRA was passed in March of 2020 and imposed paid leave requirements on employers with fewer than 500 employees and governmental employers. Employees impacted by certain COVID-19 events were eligible for paid sick leave and paid family leave from April 1, 2020 through Dec. 31, 2020. Employers providing this paid leave (except for governmental entities) were entitled to payroll tax credits on their 2020 Forms 941, Employer’s Quarterly Federal Tax Return.
The Consolidated Appropriations Act passed in December of 2020 allowed employers to voluntarily provide paid sick leave and paid family leave to employees from Jan. 1, 2021 to March 31, 2021, under the same terms as applied to 2020. The IRS has FAQs about tax credits for paid leave provided prior to April 1, 2021.
Under ARPA, employers with fewer than 500 employees and certain governmental employers may voluntarily provide paid sick and paid family leave to employees impacted by COVID from April 1, 2021 through Sept. 30, 2021. When calculating the number of employees for related employers, aggregation rules under the Family and Medical Leave Act apply.
Employees are eligible for paid sick leave and paid family leave if they are unable to work or telework due to a need to quarantine or seek a medical diagnosis or immunization for COVID-19, care for someone quarantined or care for a child because the child’s school or daycare facility is closed or daycare provider is unavailable due to COVID-19 precautions. Employees can receive paid leave if they are seeking or awaiting the results of a COVID-19 medical diagnosis or test due to exposure to the virus or because their employer has requested the diagnosis or test. In addition, paid leave can be provided to employees obtaining immunizations related to COVID-19 or recovering from any injury, disability, illness or condition related to such immunizations.
Employees may be given up to 80 hours of paid sick leave at their regular pay, or the applicable minimum wage if greater, up to $511 per day ($5,110 in total) for leave for self-care or two-thirds of pay up to $200 per day ($2,000 in total) for leave to care for others or a child. Employees can receive up to 12 weeks of paid family leave at two-thirds of their regular pay up to $200 per day ($12,000 in total). Contributions an employer makes to a collectively bargained defined benefit pension plan and collectively bargained apprenticeship program are included in wages subject to the dollar limits. These ARPA paid leave limits are available regardless of how much paid sick leave or paid family leave an employee received under the FFCRA.
Employers paying sick leave and family leave wages are entitled to a credit for the wages paid, plus the collectively bargained plan and program contributions, related employer social security and Medicare tax and health plan expenses for these employees. Health plan expenses include employer and employee pretax contributions for group medical, dental and vision coverage and contributions to HRAs and health FSAs. This refundable credit is applied against employer Medicare taxes on wages paid to all employees.
Eligible employers can claim payroll tax credits for paid sick leave and paid family leave on their 2021 Forms 941 for the second and third quarters, as applicable. Under ARPA, governmental entities are eligible for the payroll tax credit, except for federal governmental entities unless they are tax-exempt under section 501(c)(3). Employers who expect to receive a refund for paid leave on their quarterly Forms 941 can reduce their federal employment tax deposits during a quarter or request an advance refund of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The IRS has published FAQs regarding tax credits for paid leave provided after March 31, 2021 under ARPA, and has also issued a Fact Sheet.