The American Rescue Plan Act of 2021 (ARP) allows certain businesses (generally, employers with fewer than 500 employees and non-federal governmental employers) to claim refundable tax credits as a reimbursement for the cost of providing paid sick and family leave from April 1, 2021 through September 30, 2021 to their employees due to COVID-19, including leave taken by employees to receive or recover from COVID-19 vaccinations. Self-employed individuals are eligible for similar tax credits.
The paid leave credits under the ARP are tax credits against the employer’s share of the Medicare tax and are refundable (allowing the employer to reimbursement of the full amount of the credits if it exceeds the employer’s share of the Medicare tax).
The credit is available to employers who qualify and voluntarily provide employees with Emergency Paid Sick Leave and/or Expanded Family, and Medical Leave through September 30, 2021. Employers must be aware of the new requirements under the ARP to qualify for the extended credit:
- Employers may voluntarily provide a new bank of up to 80 hours of Emergency Paid Sick Leave, for which the tax credit will apply starting April 1.
- Employers must expand their list of reasons for leave to include getting a COVID-19 vaccine, recovering from adverse reactions to the vaccine, and awaiting the results of a COVID diagnosis or test after having close contact with a person with COVID-19 or at the employer’s request.
- The first ten days of Expanded Family and Medical Leave must be paid.
- Employers who choose to provide the qualifying paid leave and want to qualify for the tax credit are prohibited from discriminating in favor of highly compensated employees, full-time employees, or based on employment tenure.
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 rate of pay. 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 two-thirds of the employee’s regular pay rate. 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) increase the amount of the tax credit.
Employers can claim the credit on Form 941. Furthermore, employers may anticipate claiming the credits on Form 941 by retaining 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 for all employees up to the amount of credit for which they are eligible. An employer may request an advance of the credits by filing Form 7200 if the employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages.
For a specific explanation on how to calculate the credit, please see the instructions for Form 941.
If you have any questions regarding these credits, please contact Emily L. Burdick at 313-223-3127, or any one of the attorneys in our Tax Group.