IRS Releases Details on American Rescue Plan Tax Credit for Paid Leave to Help Small Businesses
Through The American Rescue Plan Act of 2021 (ARP), President Biden offers a tax credit to small and mid-size employers with less than 500 employees. This tax credit is referred to as the “ARP Tax Credit” or “paid leave tax credit.” It is being offered in exchange for paid time off to employees to get the COVID-19 shot and possible days for recovery. This incentive will hopefully boost the vaccination rate to reach 200 million injections by April 29th.
An eligible employer is a business with less than 500 employees. Small and midsize employers, self-employed individuals, and certain governmental employers may claim tax credits to cover the cost of PTO, sick leave, and family leave. These tax credits are for wages paid for leave from April 1, 2021, through September 30, 2021.
Employers may claim tax credits for wages paid to an employee for time off who could not work (or telework) due to the following reasons.
- Having COVID-19 symptoms needing a doctor appointment
- Being tested for COVID-19
- Under quarantine or caring for someone with the disease
- Caring for a child whose school or care provider is closed due to COVID-19
- Getting the COVID-19 vaccination
- Recovering from injury, disability, illness, or condition resulting from the injection
ARP tax credits calculation and limitations
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 2/3rds of the employee’s regular rate of pay.
There are refund limits on paid sick leave wages to the ARP tax credit, such as
- Paid sick leave wages is equal to sick leave wages paid for COVID-19 related reasons up to two weeks (80 hours)
- Paid wages are limited to $511 per day
- $5,110 in the aggregate, at 100 percent of the employee’s regular rate of pay.
The tax credit for paid family leave wages
- Paid family leave wages are equal to the family leave wages paid for up to twelve weeks
- Limited to $200 per day
- $12,000 in the aggregate, at 2/3rds of the employee’s regular rate of pay.
Tax credits may increase due to health plan expenses, contributions, and bargained benefits. Additionally, the employer’s share of social security and Medicare taxes paid on the wages will be a factor depending on daily and total limits.
Reporting for ARP Tax Credit
Eligible employers will report wages for each quarter using Form 941, Employer’s Quarterly Federal Tax Return. Employers will report total paid sick and family leave wages. The total includes:
- Qualified health plan expenses
- Bargained contributions
- The employer’s share of social security and Medicare taxes on the paid leave wages
According to IR-2021-90, “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.”
An employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, if the employer has not saved enough federal employment taxes to cover the tax liability. The advanced credits will be reported when the employer when filing Form 941 for the corresponding quarter.
Self-employed individuals will claim these tax credits when filing their Form 1040, U.S. Individual Income Tax Return.
Here is a form that you may submit to your employer or a company may use with their staff2021_EXPENSE FORMS_COVID VACCINATION PAY CERTIFICATION-2021
We will continue to provide additional updates regarding this and other pandemic legislation. There is plenty of information available to assist taxpayers with questions about employee tax credits. Contact us today to review your options.
Maria is a Partner at Wilke & Associates, servicing closely-held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.