Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: Special Issues for Employees

 

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.

103. Are qualified sick leave wages and qualified family leave wages taxable to employees? (added June 11, 2021)

Yes, generally. Under sections 3131(f)(2) and 3132(f)(2) of the Code, qualified 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), so the employee must pay social security and Medicare taxes (and for railroad employees, Tier II of the Railroad Retirement Tax Act tax), unless the qualified leave wages are subject to an exclusion from employment under section 3121(b)(1)-(22) of the Code or exclusions from compensation under section 3231(e)(1) of the Code. In addition, wages are generally compensation for services subject to income tax under section 61 of the Code and federal income tax withholding under section 3402 of the Code unless an exception applies. Sections 3131 and 3132 of the Code do not include an exception for qualified leave wages from income.

104. Are qualified sick leave wages and qualified family leave wages excluded from gross income as "qualified disaster relief payments"? (added June 11, 2021)

No. Section 139 of the Code excludes from a taxpayer's gross income certain payments to individuals to reimburse or pay for expenses related to a qualified disaster ("qualified disaster relief payments"). Although the COVID-19 outbreak is a "qualified disaster" for purposes of section 139 of the Code (see below), qualified leave wages are not excludible qualified disaster relief payments, because qualified leave wages are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular expenses that an individual would incur due to COVID-19.

Section 139(c)(2) of the Code provides that for purposes of section 139 of the Code, the term "qualified disaster" includes a federally declared disaster, as defined by 165(i)(5)(A) of the Code. The COVID-19 pandemic is a "federally declared disaster," as defined by section 165(i)(5)(A) of the Code. On March 13, 2020, the President of the United States issued a Proclamation declaring a national emergency concerning the Novel Coronavirus Disease (COVID-19) outbreak, stating that the ongoing COVID-19 pandemic warrants an emergency determination under section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 – 5207. A "qualified disaster relief payment" is defined by section 139(b) of the Code to include any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Qualified disaster relief payments do not include income replacements such as sick leave or other paid time off paid by an employer.

105. Can an employee receive both "qualified sick leave wages" and "qualified family leave wages"? (added June 11, 2021)

Yes, but at different times. Section 3131 of the Code provides that wages taken into account for determining the paid sick leave credit will not be taken into account for determining the paid family leave credit allowed under section 3132 of the Code. Similarly, section 3132 of the Code provides that wages taken into account for determining the paid family leave credit will not be taken into account for determining the paid sick leave credit allowed under section 3131 of the Code.

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