To continue our discussion on American Rescue Plan Act of 2021, the IRS and Treasury recently released additional guidance on the paid sick and family leave available to employees due to COVID-19 and the corresponding tax credits available to eligible employers in 2021. Eligible Employer is any business with fewer than 500 employees, includes tax-exempt organizations and certain governmental employers. Self Employed individuals may also be eligible for similar tax credits claimed on their individual Form 1040.

These employer tax credits are based on paid leave taken by employees not able to work or telework due to reasons related to COVID-19, which includes leave taken to receive or recover from a COVID-19 vaccination. This paid leave tax credit is against the employer’s share of Medicare tax and is fully refundable. Employers are eligible to claim these credits on paid sick and family leave taken between April 1, 2021 through September 30, 2021.

The tax credit is equal to the sick leave wages paid for the COVID-19 related reasons for up to two weeks (80 hours), limited to $511 per day ($5,110 in the aggregate) at the employee’s regular rate of pay. For the tax credit for paid family leave wages there are similar restrictions, but notice the differences.  The tax credit for paid family leave wages is equal to the family leave wages paid for up to twelve weeks, limited to $200 per day ($12,000 in the aggregate) at 2/3^rd of the employee’s regular rate of pay. To meet the daily and total caps, the tax credit amounts can be increased by allocable health plan expenses, certain benefit contributions, as well as the employer’s share of social security and Medicare taxes paid on the wages.

To report the credit, employers will need to include total paid sick and family leave wages, eligible health plan expenses, certain benefit contributions, and the eligible employer’s share of social security and Medicare taxes on the paid leave wages for the applicable quarter on their federal employment tax return (such as Form 941- Employer’s Quarterly Federal Tax Return).

Proactively, eligible employers can withhold federal employment tax deposits, up to the amount of the credit they are eligible for. If an employer‘s federal employment tax deposits withheld do not cover the credit amounts, an advance can be requested by filing a Form 7200 Advance Payment of Employer Credits due to COVID-19. Then the advance payment will need to be reported on the applicable quarter’s Form 941, or similar federal employment tax return.

If you need assistance with this or interpreting any other new tax credits, our state and local tax (SALT) professionals are available to assist.  Please contact our SALT Team at SALT@GMCO.com

Our expert team at Geffen Mesher is ready and prepared to help navigate these changes for your business.