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

 

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.

COVID-19-Related Tax Credits Extended for Paid Leave for Periods Beginning April 1, 2021, through September 30, 2021.

Sections 3131 through 3133 of the Code were enacted by the ARP, on March 11, 2021, to allow Eligible Employers to claim refundable tax credits that reimburse them for the cost of providing qualified sick and family leave wages with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, either for the employee's own health needs or to care for family members. Employees may receive up to ten days of paid sick leave and up to 12 weeks of paid family leave. Certain self-employed individuals in similar circumstances are entitled to similar credits.

For a more detailed overview of the law, see "Overview of Paid Leave Tax Credits under the ARP," below.

For FAQs, see "General Information FAQs," and the sections that follow. The FAQs will be updated periodically to address changes in the law or additional questions as they are raised.

Overview of Paid Leave Tax Credits under the ARP

The ARP amended and extended the tax credits available to Eligible Employers providing paid sick and family leave consistent with the leave provided under the FFCRA. Under the FFCRA, enacted March 18, 2020, employers were required to provide paid leave through two separate provisions: (1) the EPSLA, under which employees received to up to 80 hours of paid sick time when they were unable to work for certain reasons related to COVID-19, and (2) Expanded FMLA, under which employees received paid family leave to care for a child whose school or place of care was closed or child care provider was unavailable for reasons related to COVID-19. The obligation for employers to provide paid leave under the EPSLA and the Expanded FMLA applied to qualified leave wages paid with respect to leave taken by employees beginning on April 1, 2020, through December 31, 2020. The FFCRA provided that Eligible Employers providing paid leave that satisfied the requirements of the EPSLA and the Expanded FMLA for the periods of time during which employees were unable to work (including telework) were permitted to claim fully refundable tax credits to cover the cost of the paid leave wages. Certain self-employed persons in similar circumstances were entitled to similar credits. The Relief Act extended the tax credits available to Eligible Employers for paid sick and family leave that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the Relief Act, for qualified leave wages paid with respect to leave taken by employees through March 31, 2021.

Under the ARP, refundable tax credits are available to Eligible Employers providing paid sick and family leave wages that otherwise would have satisfied the requirements of the EPSLA and Expanded FMLA, as amended for purposes of the ARP, paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021. The ARP codified these credits in sections 3131 through 3133 of the Code.  These tax credits are increased by the Eligible Employer's cost of maintaining health insurance coverage allocable to the qualified leave wages ("allocable qualified health plan expenses") and certain amounts paid under collectively bargained agreements by the Eligible Employer that are properly allocable to the qualified leave wages ("certain collectively bargained contributions"). Under section 3133 of the Code, the tax credits are also increased by the employer's share of social security and Medicare taxes imposed on the qualified leave wages.

Under sections 9642 and 9643 of the ARP, self-employed individuals are entitled to equivalent credits based on similar circumstances in which the individual is unable to work. For more information about how self-employed individuals can claim the credits, see "Specific Provisions Related to Self-Employed Individuals".

For leave required under the FFCRA prior to January 1, 2021, the Wage and Hour Division of the Department of Labor (DOL) administers the EPSLA and the Expanded FMLA and issued regulations at 29 CFR Part 826 and posted FAQs and relevant information about the paid leave provisions. See the DOL's Families First Coronavirus Response Act: Questions and Answers.

The following section provides an overview of the ARP's refundable paid leave credit provisions, and the FAQs that follow provide more detailed information regarding the requirements, limitations, and application of the paid leave credits.

Overview of Paid Sick Leave Refundable Credit (updated July 29, 2021)

Under the ARP, Eligible Employers are entitled to tax credits if they provide employees with paid sick leave if the employee is unable to work due to any of the following:

  1. the employee is under a Federal, State, or local quarantine or isolation order related to COVID-19;
     
  2. the employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
     
  3. the employee is:
     
    • experiencing symptoms of COVID-19 and seeking a medical diagnosis,
    • 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
    • obtaining immunization related to COVID–19 or recovering from any injury, disability, illness, or condition related to the immunization;
       
  4. 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;
     
  5. the employee is caring for the child of the employee if the school or place of care of the child has been closed, or the childcare provider of the child is unavailable, due to COVID–19 precautions; or
     
  6. the employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services (HHS) in consultation with the Secretary of the Treasury and the Secretary of Labor. The Secretary of HHS has specified, after consultation with the Secretaries of Treasury and Labor, that a substantially similar condition is one in which the employee takes leave:
     

An Eligible Employer may claim a tax credit for qualified sick leave wages in the following amounts:

The Eligible Employer is entitled to a fully refundable tax credit for qualified sick leave wages it pays. The Eligible Employer is subject to the employer's share of social security and Medicare taxes imposed on those qualified sick leave wages; however, the tax credit is increased by the amount of the employer's share of social security and Medicare taxes imposed on the qualified sick leave wages, as well as allocable qualified health plan expenses, and certain collectively bargained contributions during the sick leave period.

Overview of Paid Family Leave Refundable Credit

Under the ARP, Eligible Employers are entitled to tax credits if they provide employees with paid family leave because the employee is unable to work due to any of the reasons listed above for which Eligible Employers may provide paid sick leave that would have satisfied the requirements of the EPSLA, as amended for purposes of the ARP. An Eligible Employer may claim a tax credit for qualified family leave wages for an employee who is unable to work due to any of those circumstances, at 2/3 the employee's regular pay, up to $200 per day and $12,000 in the aggregate for qualified family leave wages paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021. Up to 12 weeks of qualifying leave can be counted towards the paid family leave tax credit. An Eligible Employer may not claim the credit for providing paid family leave for any wages for which it claimed a tax credit for providing paid sick leave. For more information, see "What is included in "qualified family leave wages"?"

The Eligible Employer is entitled to a fully refundable tax credit for qualified family leave wages it pays. The Eligible Employer is subject to the employer's share of social security and Medicare taxes imposed on those wages; however, the Eligible Employer's tax credit is increased by the employer's share of social security and Medicare taxes imposed on the qualified sick leave wages, as well as allocable qualified health plan expenses, and certain collectively bargained contributions during the family leave period. For more information, see "How does an Eligible Employer determine the amounts and rate of pay of the qualified family leave wages to pay?"

Claiming the Paid Sick and Family Leave Credits

Under sections 3131 through 3133 of the Code, Eligible Employers are entitled to receive the credits for the full amount of qualified leave wages and certain collectively bargained contributions, plus allocable qualified health plan expenses and the amount of the employer's share of social security and Medicare taxes imposed on the qualified leave wages, that are paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021. The credit is allowed against the taxes imposed on employers by section 3111(b) of the Code (Hospital Insurance (Medicare tax)) and so much of the taxes imposed on employers under section 3221(a) of the Code as are attributable to the rate in effect under section 3111(b) of the Code (the Railroad Retirement Tax Act Tier 1 rate) on all wages and compensation, respectively, paid to all employees. If the amount of the credit exceeds the Eligible Employer's share of these federal employment taxes, then the excess is treated as an overpayment and refunded to the Eligible Employer under sections 6402(a) or 6413(b) of the Code. The qualified leave wages are subject to the taxes imposed on employers by sections 3111(a) and 3111(b) of the Code and, for railroad employers, the Railroad Retirement Tax Act Tier 1 rate under section 3221(a) of the Code.

Eligible Employers that pay qualified leave wages may retain an amount of all federal employment taxes equal to the amount of the anticipated tax credits based on qualified leave wages paid (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), rather than depositing the employment taxes with the IRS. The federal employment taxes that are available for retention by Eligible Employers include federal income taxes 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.

If the federal employment taxes that are available for retention are not sufficient to cover the Eligible Employer's cost of 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), then the Eligible Employer may file a request for an advance payment from the IRS using the applicable version of Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF for the relevant calendar quarter.

Eligible Employers claiming these credits must retain records and documentation related to and supporting each employee's leave to substantiate the claim for the credits, as well retaining the Forms 941, Employer's Quarterly Federal Tax Return PDF, and 7200, and any other applicable filings made to the IRS requesting the credits.

For more detail on the refundable tax credits and the procedures to receive payment of the advance credit, see "How to Claim the Credits."

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