The IRS has released an FAQ for small and mid-sized employers to help them compute COVID-19 related paid sick and family leave credits for the second and third quarters of 2021.
Under the American Rescue Plan (ARP), paid sick and family leave credits reimburse eligible employers for the cost of providing paid sick and family leave to their employees for reasons related to COVID-19, including leave taken by employees to receive or recover from COVID-19 vaccinations. Self-employed individuals are eligible for similar tax credits.
Paid sick and family leave tax credits under the ARP are similar to those created by the Families First Coronavirus Response Act (FFCRA) and COVID-related Tax Relief Act of 2020. The ARP amends and extends these credits and covers leave wages paid to an employee who is seeking or awaiting the results of a test for COVID-19, obtaining immunizations related to COVID-19, or recovering from being vaccinated. Additionally, under the ARP, eligible employers may now claim the credit for paid family leave wages for these same reasons.
The FAQs include information on how eligible employers may claim the paid sick and family leave credits, including how to file for and compute the applicable credit amounts, and how to receive advance payments for and refunds of the credits.
The paid leave credits under the ARP are tax credits against the employer’s share of Medicare tax. The tax credits are refundable, which means that the employer is entitled to payment of the full amount of the credits to the extent it exceeds the employer’s share of Medicare tax.
In anticipation of the credits to be claimed on the applicable federal employment tax return, eligible employers can keep 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 up to the amount of the credit for which they are eligible.
If the eligible employer does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, the eligible employer may request an advance of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Self-employed individuals may claim comparable credits on the Form 1040, U.S. Individual Income Tax Return.
For more information, read the complete FAQ on Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 for Leave After March 31, 2021.
