The American Rescue Plan Act of 2021 (ARP) allows employers 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, including leave taken by employees to receive or recover from COVID-19 vaccinations. The ARP tax credits are available to eligible employers for leave taken between April 1, 2021, and September 30, 2021.
Who’s Eligible
An eligible employer is any business, including a tax-exempt organization, with fewer than 500 employees. An eligible employer also includes some governmental employers. Self-employed individuals are eligible for similar tax credits.
Which Tax Credits Can Be Claimed
Eligible employers are entitled to tax credits for wages paid for leave taken by employees who cannot work or telework due to reasons related to COVID-19. This includes leave taken to receive COVID–19 vaccinations or to recover from any injury, disability, illness, or condition related to the vaccinations. These tax credits are available for wages paid for leave from April 1, 2021, through September 30, 2021.
Calculating The Credit Amount
The paid leave credits under the ARP are tax credits against the employer’s share of the Medicare tax. The tax credits are refundable, which means that the employer is entitled to payment of the full amount of the credits if it exceeds the employer’s share of the Medicare tax.
The tax credit for paid sick leave wages is:
- Equal to the sick leave wages paid for COVID-19 related reasons for up to two weeks (80 hours)
- Limited to $511 per day and $5,110 in the aggregate, at 100 percent of the employee’s regular pay rate.
The tax credit for paid family leave wages is:
- Equal to the family leave wages paid for up to twelve weeks
- Limited to $200 per day and $12,000 in the aggregate, at 2/3rds of the employee’s regular pay rate.
The amount of these tax credits is increased by allocable health plan expenses and contributions for certain collectively bargained benefits, as well as the employer’s share of social security and Medicare taxes paid on the wages (up to the respective daily and total caps).
How To Claim The Credit
Eligible employers report their total paid sick and family leave wages (plus the eligible health plan expenses and collectively bargained contributions and the eligible employer’s share of social security and Medicare taxes on the paid leave wages) for each quarter on their federal employment tax return, usually Form 941, Employer’s Quarterly Federal Tax Return.
Form 941 is used by most employers to report income tax and social security and Medicare taxes withheld from employee wages, as well as the employer’s own share of social security and Medicare taxes.
In anticipation of claiming the credits on Form 941, eligible employers can keep the federal employment taxes that they otherwise would have deposited, including:
- Federal income tax withheld from employees
- Employees’ share of Social Security and Medicare taxes
- Employer’s share of social security and Medicare taxes for all employees up to the amount of credit they are eligible for
Suppose an eligible employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages (plus the eligible health plan expenses and collectively bargained contributions and the eligible employer’s share of social security and Medicare taxes on the paid leave wages). In that case, the eligible employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will account for the amounts received as an advance when it files its Form 941, Employer’s Quarterly Federal Tax Return, for the relevant quarter.
