Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: What is an Eligible Employer?

 

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.

17. How is the "fewer than 500 employees" threshold determined for purposes of determining an employer's eligibility for the credits? (added June 11, 2021)

DOL guidance under the FFCRA provided that an employer has fewer than 500 employees if, at the time its employee's leave is to be taken, it employs fewer than 500 full-time and part-time employees within the United States, which includes any State of the United States, the District of Columbia, or any Territory or possession of the United States. In making this determination, the employer should include employees on leave; temporary employees who are jointly employed by it and another employer; and day laborers supplied by a temporary agency (regardless of whether it is the temporary agency or the client firm if there is a continuing employment relationship). Workers who are independent contractors under the Fair Labor Standards Act (FLSA), rather than employees, are not considered employees for purposes of the 500-employee threshold. In general, two or more entities are separate employers unless they meet the integrated employer test under the Family and Medical Leave Act of 1993 (FMLA). If two entities are an integrated employer under the FMLA, under the test provided by the DOL, then employees of all entities making up the integrated employer will be counted in determining employer coverage. These standards continue to apply for purposes of the ARP.

Note: Under the ARP, certain non-Federal governmental employers (as well as Federal governmental employers that are organizations described in section 501(c)(1) of the Code and exempt from tax under section 501(a) of the Code) may claim tax credits for providing paid leave. The 500 or fewer employee limitation does not apply to these governmental employers; hence, these governmental employers are eligible for the credit even if they have 500 or more employees.

18. Can governmental employers be Eligible Employers under sections 3131 and 3132 of the Internal Revenue Code? (added June 11, 2021)

Generally, governmental employers (including any agency or instrumentality of the government) are eligible to receive tax credits for qualified leave wages paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, without regard to the number of employees. However, 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 Code, is not an Eligible Employer and is not entitled to receive tax credits for providing qualified leave wages.

19. What organizations are considered an "instrumentality" of the Federal government for purposes of determining if an employer is an Eligible Employer under sections 3131 and 3132 of the Internal Revenue Code? (added June 11, 2021)

In general, for employment tax purposes, the IRS considers six factors in determining whether an organization is an instrumentality. The six factors that are used to determine whether an organization is an instrumentality are:

  • whether the organization is used for a governmental purpose and performs a governmental function;
  • whether performance of the organization's function is on behalf of one or more states or political subdivisions;
  • whether there are any private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner;
  • whether control and supervision of the organization is vested in public authority or authorities;
  • if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and
  • the degree of financial autonomy and the source of its operating expenses.

See Rev. Rul. 57-128, 1957-1 C.B. 311. No one factor is determinative; instrumentality status is based on all the facts and circumstances.

20. Are employers in U.S. Territories eligible for the tax credits? (added June 11, 2021)

Yes. Employers in U.S. Territories are eligible to claim the tax credits for qualified leave wages, assuming they are otherwise Eligible Employers. Sections 3131(f)(2) and 3132(f)(2) of the Code provide, in relevant part, that qualified sick leave wages and qualified family leave wages, respectively, are wages as defined in section 3121(a) of the Code for purposes of the Federal Insurance Contributions Act ("FICA") tax. Under section 3121(b), payments of wages by employers in U.S. territories are subject to FICA.

For more information on defining an Eligible Employer, see "Which employers are Eligible Employers for purposes of claiming the tax credits?"

21. Are household employers eligible for the tax credits? (added June 11, 2021)

Yes. Assuming a household employer is otherwise an Eligible Employer, the Eligible Employer may claim tax credits for providing paid leave under sections 3131 and 3132 of the Code if the leave (1) would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, and (2) is 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) or compensation (as defined in section 3231€ of the Code, determined without regard to the exclusions from compensation under section 3231€(1) of the Code).

Whether a household employer provides paid leave to a household worker that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, depends on whether the household employer is an employer under the FLSA as interpreted by the DOL. In general, a household employer is considered to be the employer of the household worker under the FLSA if the household worker is "economically dependent" on the household employer for the opportunity to work.

22. Can Eligible Employers claim the tax credit for amounts paid to H-2A visa holders? (added June 11, 2021)

Yes. Sections 3131(f)(2) and 3132(f)(2) of the Code define qualified sick leave wages and qualified family leave wages for purposes of the EPSLA and the Expanded FMLA, respectively, and as amended for purposes of the ARP, as 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. Therefore, although section 3121(b)(1) of the Code excludes from "employment" services performed by H-2A workers, Eligible Employers are entitled to tax credits under sections 3131 and 3132 of the Code for qualified leave wages paid to H-2A workers.

23. Are tribal governments eligible for the tax credits? (added June 11, 2021)

Yes. Tribal governments that provide paid sick and family leave that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, are eligible to claim the tax credits for qualified leave wages.

24. Is an otherwise Eligible Employer eligible for the credit if the employer discriminates in favor of highly compensated employees, full-time employees, or employees on the basis of employment tenure? (added June 11, 2021)

No. Under section 3131(j) and 3132(j) of the Code, a credit for qualified leave wages will not be allowed if an otherwise Eligible Employer discriminates in favor of highly compensated employees within the meaning of section 414(q) of the Code, full-time employees, or employees on the basis of employment tenure with that Eligible Employer with respect to the availability of the provision of qualified sick or family leave wages. A highly compensated employee within the meaning of section 414(q) the Code is an employee that (1) was a five percent owner at any time during the year or the preceding year or (2) received more than $130,000 (indexed for 2021) in pay for the preceding year and, if elected by the employer, was in the top 20 percent of employees ranked by pay for the preceding year. To show that it does not discriminate, an Eligible Employer should maintain records demonstrating the availability of qualified leave wages to highly compensated and non-highly compensated employees, full-time and part-time employees, and without regard to employees' tenure with the Eligible Employer.

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