Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: General Information

 

Note: These FAQs address the tax credits available under the American Rescue Plan Act of 2021 (the "ARP") by employers with fewer than 500 employees and certain governmental employers without regard to the number of employees ("Eligible Employers") for qualified sick and family leave wages ("qualified leave wages") paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, as well as the equivalent credits available for certain self-employed individuals. For information about the tax credits that may be claimed for qualified leave wages paid with respect to leave taken by employees prior to April 1, 2021, under the Families First Coronavirus Response Act ("FFCRA") and the COVID-related Tax Relief Act (the "Relief Act"), see Tax Credits for Paid Leave Under the Families First Coronavirus Response Act for Leave Prior to April 1, 2021 FAQs.

Although the requirement that Eligible Employers provide leave under the Emergency Paid Sick Leave Act ("EPSLA") and Emergency Family and Medical Leave Expansion Act ("Expanded FMLA") under the FFCRA does not apply after December 31, 2020, the tax credits under sections 3131 through 3133 of the Internal Revenue Code ("the Code") are available for qualified leave wages an Eligible Employer provides with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, if the leave would have satisfied the requirements of the EPSLA and Expanded FMLA, as amended for purposes of the ARP.

Throughout these FAQs, the use of the word "work," unless otherwise noted, is inclusive of telework.

1. What paid leave tax credits does the American Rescue Plan Act of 2021 provide? (added June 11, 2021)

The ARP provides Eligible Employers with tax credits to cover certain costs of providing employees with paid sick and family leave for specified reasons related to COVID-19, for qualified leave wages paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021.

2. When can Eligible Employers claim the paid leave tax credits? (added June 11, 2021)

Under the ARP, Eligible Employers may claim tax credits for qualified leave wages (plus allocable qualified health plan expenses, certain collectively bargained contributions, and the employer's share of social security and Medicare taxes imposed on the qualified leave wages) paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021.

Eligible Employers may claim the credits on their federal employment tax returns (e.g., Form 941, Employer's Quarterly Federal Tax Return PDF), but they can benefit more quickly from the credits by reducing their federal employment tax deposits. If there are insufficient federal employment taxes to cover the amount of the credits, an Eligible Employer may request an advance payment of the credits from the IRS by submitting the applicable version of Form 7200, Advance Payment of Employer Credits Due to COVID-19 for the relevant calendar quarter.

For the circumstances, amounts, and period for which the credits are available, see "Determining the Amount of the Tax Credit for Qualified Sick Leave Wages," "Determining the Amount of the Tax Credit for Qualified Family Leave Wages," and "Periods of Time for Which Credits are Available."

3. When will Eligible Employers receive the credits? (added June 11, 2021)

Eligible Employers may receive payment of the credits after qualified leave wages have been paid, in accordance with applicable IRS procedures.

For more information, see "How do Eligible Employers claim the credit?"

4. What documentation must an Eligible Employer retain to substantiate eligibility to claim the tax credits? (added June 11, 2021)

Eligible Employers claiming the credits for qualified leave wages (plus allocable qualified health plan expenses, certain collectively bargained contributions, and the employer's share of social security and Medicare taxes imposed on the qualified leave wages) must retain records and documentation related to and supporting each employee's leave to substantiate the claim for the credits, and retain the Forms 941, Employer's Quarterly Federal Tax Return PDF, and 7200, Advance of Employer Credits Due To COVID-19 PDF, and any other applicable filings made to the IRS requesting the credits.

For more information, see "How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?"

5. Which employers are Eligible Employers for purposes of claiming the tax credits? (added June 11, 2021)

Employers that are Eligible Employers entitled to claim the refundable tax credits with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, are employers with fewer than 500 employees (and certain governmental employers without regard to the number of employees) that provide paid leave that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP.

Note: Neither the Federal government nor any agency or instrumentality of the Federal government is an Eligible Employer entitled to receive tax credits for providing paid leave wages under sections 3131 or 3132 of the Code, except for an organization described in section 501(c)(1) of the Code. State or local governments and their agencies or instrumentalities and tribal governments that pay qualified leave wages under sections 3131 or 3132 of the Code are Eligible Employers entitled to claim the tax credits for qualified leave wages.

For more information, see "How is the "fewer than 500 employees" threshold determined for purposes of determining an employer's eligibility for the credits", and "What is an Eligible Employer?"

6. What makes the credits "fully refundable"? (added June 11, 2021)

The credits are fully refundable because the Eligible Employer may get a refund if the amount of the credits is more than certain federal employment taxes the Eligible Employer owes. That is, if for any calendar quarter the amount of the credits the Eligible Employer is entitled to exceeds the Eligible Employer's portion of the Medicare tax on all wages (or the Eligible Employer's portion of the Medicare tax on all compensation for Eligible Employers subject to the Railroad Retirement Tax Act) paid to all employees, then the excess is treated as an overpayment and refunded to the Eligible Employer under section 6402(a) or 6413(b) of the Code.

7. What is the amount of the refundable tax credits available to Eligible Employers? (added June 11, 2021)

The credits are equal to 100 percent of up to two weeks (to a maximum of 80 hours) of the qualified sick leave wages and up to 12 weeks of the qualified family leave wages (including certain collectively bargained contributions), plus allocable qualified health plan expenses, and the employer's allocable share of social security and Medicare taxes imposed on the qualified leave wages) that an Eligible Employer pays with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021.

Example: An Eligible Employer pays $10,000 in qualified sick leave wages and qualified family leave wages with respect to leave taken by an employee during the second quarter of 2021 (that is, April 1, 2021, through June 30, 2021). The Eligible Employer must withhold the employee's share of social security and Medicare taxes imposed on the $10,000 in qualified leave wages and it owes the employer's share of social security tax and Medicare tax imposed on the $10,000. The Eligible Employer is entitled to a credit equal to $10,765, which includes the $10,000 in qualified leave wages plus $620 for the employer's share of social security tax, plus $145 for the employer's share of Medicare tax. (This example does not include any allocable qualified health plan expenses or certain collectively bargained contributions.) When the Eligible Employer files its federal employment tax return for the second quarter of 2021, this amount may be applied first against the Eligible Employer's share of Medicare tax on any wages paid in the second quarter of 2021. Any credit amount in excess of the Eligible Employer's share of Medicare tax is refundable.

For more information, see "What is included in "qualified sick leave wages"?" and "What is included in "qualified family leave wages"?"

8. What are "qualified sick leave wages"? (updated July 29, 2021)

Qualified sick leave wages are wages (as defined in section 3121(a) of the Code, determined without regard to the exclusions from employment under section 3121(b)(1)-(22) of the Code) and compensation (as defined in section 3231(e) of the Code, determined without regard to the exclusions from compensation under section 3231(e)(1) of the Code) that an Eligible Employer pays that would have satisfied the requirements of the EPSLA, as amended for purposes of the ARP, to an employee who is unable to work because of:

  • The following reasons under section 5102(a) of the EPSLA, as amended for purposes of the ARP, related to the employee's personal health status:
    • the employee is under a Federal, State, or local quarantine or isolation order related to COVID-19 or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19,
    • the employee has COVID-19 symptoms and is seeking a medical diagnosis, is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of COVID–19 and the employee has been exposed to COVID–19 or the employee's employer has requested the test or diagnosis, or
    • the employee is obtaining the COVID-19 vaccine, or recovering from conditions related to obtaining the COVID-19 vaccine);
       
  • Or the following reasons under section 5102(a) of the EPSLA, as amended for purposes of the ARP, related to the employee's need to care for others:
    • the employee is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19,
    • the employee is caring for a child whose school or place of care is closed or childcare provider is unavailable due to COVID-19 precautions, or
    • the employee is accompanying an individual to obtain the COVID-19 vaccine or caring for an individual who is recovering from conditions related to obtaining the COVID-19 vaccine.

For more information, see "What is included in "qualified sick leave wages"?"

9. What are "qualified family leave wages"? (updated July 29, 2021)

Qualified family leave wages are wages (as defined in section 3121(a) of the Code, determined without regard to the exclusions from employment under section 3121(b)(1)-(22) of the Code) and compensation (as defined in section 3231(e) of the Code, determined without regard to the exclusions from compensation under section 3231(e)(1) of the Code) that an Eligible Employer pays that would have satisfied the requirements of the Expanded FMLA, as amended for purposes of the ARP, to an employee who is unable to work because of:

  • The following reasons related to the employee's personal health status:
    • the employee is under a Federal, State, or local quarantine or isolation order related to COVID-19 or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19,
    • the employee has COVID-19 symptoms and is seeking a medical diagnosis, is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of COVID–19 and the employee has been exposed to COVID–19 or the employee's employer has requested the test or diagnosis, or
    • the employee is obtaining the COVID-19 vaccine or recovering from conditions related to obtaining the COVID-19 vaccine;
  • Or the following reasons related to the employee's need to care for others:
    • the employee is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19, or
    • the employee is caring for a child whose school or place of care is closed or childcare provider is unavailable due to COVID-19 precautions, or
    • the employee is accompanying an individual to obtain the COVID-19 vaccine or caring for an individual who is recovering from conditions related to obtaining the COVID-19 vaccine.

For more information, see "What is included in "qualified family leave wages"?"

10. What are "qualified health plan expenses"? (added June 11, 2021)

Qualified health plan expenses are amounts paid or incurred by an Eligible Employer to provide and maintain a group health plan (as defined in section 5000(b)(1) of the Code), but only to the extent that the amounts are excluded from the gross income of employees by reason by section 106(a) of the Code.

For more information, see "Determining the Amount of Allocable Qualified Health Plan Expenses."

11. What are the "certain collectively bargained contributions" paid by an Eligible Employer that are eligible for the credit? (added June 11, 2021)

The collectively bargained contributions paid by an Eligible Employer that are eligible for the credit are collectively bargained defined benefit pension plan contributions and collectively bargained apprenticeship program contributions that are properly allocable to qualified leave wages.

For more information, see "Determining the Amount of Allocable Collectively Bargained Contributions."

12. How do Eligible Employers claim the credits? (added June 11, 2021)

Eligible Employers report their total qualified leave wages (plus allocable qualified health plan expenses, certain collectively bargained contributions, and the employer's share of social security and Medicare taxes imposed on the qualified leave wages) for each quarter on their federal employment tax return, usually Form 941, Employer's Quarterly Federal Tax Return PDF. 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 receiving the credits, Eligible Employers can cover qualified leave wages (plus allocable qualified health plan expenses, certain collectively bargained contributions, and the employer's share of social security and Medicare taxes  imposed on the qualified leave wages) by accessing federal employment taxes, including withheld taxes, that would otherwise be required to be deposited with the IRS. This means that in anticipation of claiming the credits on the Form 941, Eligible Employers can retain 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 employer's share of social security and Medicare taxes with respect to all employees. The Form 941 instructions PDF explain how to reflect the reduced liabilities for the quarter related to the deposit schedule.

For more information, see "How to Claim the Credits."

13. What if an Eligible Employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as qualified leave wages? (added June 11, 2021)

If an Eligible Employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as qualified leave wages (plus allocable qualified health plan expenses, certain collectively bargained contributions, and the employer's share of social security and Medicare taxes imposed on the qualified leave wages), the Eligible Employer may request an advance of the credits by completing the applicable version of Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF for the relevant calendar quarter. The Eligible Employer will account for the amounts received as an advance when it files its Form 941, Employer's Quarterly Federal Tax Return PDF, for the relevant quarter.

For more information about claiming the tax credits for providing qualified leave wages, see "How to Claim the Credits."

14. May an Eligible Employer reduce its federal employment tax deposit by the qualified leave wages that it has paid without incurring a failure to deposit penalty? (added June 11, 2021)

Yes. An Eligible Employer that pays qualified leave wages in a calendar quarter will not be subject to a penalty under section 6656 of the Code for failing to deposit federal employment taxes if:

  • the Eligible Employer paid qualified leave wages to its employees in the calendar quarter before the required deposit;
  • the total amount of federal employment taxes that the Eligible Employer does not timely deposit is less than or equal to the amount of the Eligible Employer's anticipated tax credit for the qualified leave wages for the calendar quarter as of the time of the required deposit; and
  • the Eligible Employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.

For more information about the relief from the penalty for failure to deposit federal employment taxes on account of qualified leave wages, see Notice 2021-24 PDF.

15. Are similar tax credits available to self-employed individuals? (added June 11, 2021)

Yes. Sections 9642 and 9643 of the ARP also provide comparable credits for self-employed individuals carrying on any trade or business within the meaning of section 1402 of the Code if the self-employed individual would be eligible to receive paid leave that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, if the individual were an employee of an Eligible Employer (other than the self-employed individual).

For more information about how the credits apply to self-employed individuals, see "Specific Provisions Related to Self-Employed Individuals."

16. What is the statute of limitations for assessment of potential tax attributable to a disallowance of a credit claimed under sections 3131 and 3132 of the Code? (added June 11, 2021)

The statute of limitations for assessment of any amounts of potential tax attributable to the disallowance of a credit under sections 3131 and 3132 of the Code claimed for qualified leave wages will not expire until five years from the later of: (1) the date of filing of the original return that includes the calendar quarter in which the credit was claimed, or (2) the date the return is treated as filed under section 6501(b)(2) of the Code.

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