On April 21, 2021, President Biden highlighted details of tax credits available under the American Rescue Plan (ARP) allowing employers to extend Emergency Paid Sick Leave (EPSL) and Emergency Family Medical Leave (EFML) to employees who receive a COVID-19 vaccination and/or recover from the effects of vaccination. Starting with January 1, 2021 employers are not required to provide EPSL and EFML payments and leave. If an employer pays leave wages, the employer may claim credits for these wages and certain associated amounts.
Which employers are eligible?
Any business, including a tax-exempt organization, with fewer than 500 employees is considered an eligible employer and can claim a tax credit for providing paid time off for each employee receiving the vaccine, as well as any time needed to recover from the vaccine.
According to the Internal Revenue Service (IRS), “An eligible employer also includes a governmental employer, other than the federal government and any agency or instrumentality of the federal government that is not an organization described in section 501(c)(1) of the Internal Revenue Code. Self-employed individuals are eligible for similar tax credits.”
What are eligible employers entitled to?
Employers who are eligible can claim tax credits for wages paid to employees who have taken time off as a result of receiving a COVID-19 vaccine, "or to recover from any injury, disability, illness, or condition related to the vaccinations."
The ARP's paid leave credits are tax credits applied to the employer's portion of the Medicare tax and are refundable. This means that if the credits surpass the employer's share of the Medicare tax, the employer is entitled to the full amount of the credits.
The paid leave tax credit is equal to the sick leave wages paid for COVID-19 related reasons and will offset the cost for employers in the criteria mentioned above for up to two weeks (80 hours) limited to $511 per day of paid sick leave, “and $5,110 in the aggregate, at 100 percent of the employee's regular rate of pay.”
The ARP tax credits are available to eligible employers for wages paid for sick and family leave from April 1, 2021, through September 30, 2021.
How are the tax credits calculated?
Depending on the type of sick leave, the tax credit for EPSL wages is equivalent to $200 or $511 per day.
The tax credit for EFML wages is equivalent to two-thirds of the employee's normal rate of pay for up to twelve weeks, with a daily cap of $200 and a total limit of $12,000.
As explained by the IRS, “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 can I claim the paid sick leave credit on my quarterly tax filings?
The IRS released and posted a fact sheet that outlines details of tax credits available under the ARP. The fact sheet includes instructions for employers on how to claim the paid sick leave credit on their quarterly tax filings.
Employers who are eligible for the ARP tax credit can report their total paid sick and family leave wages for each quarter on their federal employment tax return, typically Form 941, Employer’s Quarterly Federal Tax Return.
In addition to reporting total paid sick and family leave wages, employers can record eligible health plan expenses and collectively bargained contributions, as well as the eligible employer's share of social security and Medicare taxes on paid sick and family leave wages.
As outlined by the IRS, “in anticipation of claiming the credits on the Form 941 PDF, 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.”
For additional instruction on claiming paid sick leave credit, click here to view the IRS fact sheet.
To help eligible organizations understand this tax credit, below are some quick links to resources provided by government officials:
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Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding the specific application of the information to your own plan.