Back in March 2020, Congress passed the Families First Coronavirus Response Act (FFCRA) which required certain employers to offer expanded sick and family leave benefits to their employees and receive a payroll tax credit as a result. While the FFCRA leave mandate officially ended on December 31, 2020, a new version of the payroll tax credit is now available for 2021 Q2 and Q3.
The American Rescue Plan Act of 2021 (ARPA), signed on March 11, 2021, extends and enhances the expanded sick and family leave benefits from FFCRA. Besides making the payroll tax credit available through September 30, 2021, employers can now receive a tax credit for employees who take time off to receive and recover from their COVID-19 vaccinations.
Which Employers Are Eligible?
Eligible employers include businesses, self-employed individuals, tax-exempt organizations, and certain government entities with less than 500 employees. The 500-employee threshold includes both full-time and part-time employees at the time of the tax credit.
When is the Tax Credit Available?
The payroll tax credit is available for any eligible employer for sick and family leave wages paid from April 1, 2021 through September 30, 2021.
What Type of Leave is Covered Under the Tax Credit?
The leave is broken out into two categories:
- Time off for an employee affected by COVID-19; and
- Time off for a family member of an employee affected by COVID-19.
The biggest change made by the ARPA is that the payroll tax credit now covers time off for employees who receive and recover from a COVID-19 vaccination. Previously, only time off for those subject to a quarantine or those showing signs of illness from COVID-19 were covered under qualified sick leave.
How Much is the Tax Credit?
Similar to FFCRA, eligible employers may take a payroll tax credit for wages up to 80 hours for full-time employees of paid sick leave equal to either:
- the employee’s regular wage, capped at $511/day, up to $5,110 if the employee was sick or quarantining, awaiting the results of a COVID test, or obtaining or recovering from a vaccine; or
- 2/3 of the employee’s regular wage, capped at $200/day, up to $2,000, if the employee was taking time to care for someone quarantining or to provide care due to COVID-19 school or childcare provider closures.
Amounts paid to part-time employees are also eligible for the payroll tax credit. However, instead of receiving 80 hours of paid sick leave, part-time employees are only eligible for their average hours worked over a two-week period.
How do Employers Claim the Tax Credit?
Eligible employers report the payroll tax credit on their Form 941 for 2021 Q2 and Q3. Self-employed individuals can claim the payroll tax credit on their Form 1040. The credit is essentially treated as an additional tax deposit made by the employer during the quarter. Employers may opt to receive a refund of the excess amount during the quarter.
In anticipation of claiming the payroll tax credit, an employer can reduce their payroll tax deposits with the IRS during the quarter. Taxes are still withheld from employee paychecks, but the employer may instead keep the portion, up to the tax credit for which they are eligible.
Form 7200 may be filed to claim an advance of the tax credit for eligible employers. This can be done when an employer doesn’t have enough federal employment taxes set aside to cover the tax credit due.
As a practical matter, we are seeing delays in the processing time for IRS refunds. To get an immediate benefit from the payroll tax credit, we recommend reducing current tax deposits during the quarter or applying the tax credit to a subsequent quarter and reducing deposits at that time. Under the refund option, an employer may wait months before receiving a refund check.
Additionally, if using a third-party payroll provider, work with the provider ahead of time so the calculation of the payroll tax credit is seamless. Many third-party payroll providers have special codes set up in their system that allows employers to code hours towards applicable tax credit programs, making the Form 941 filing a smooth process.
If you have questions on expanded sick and family leave payroll tax credits, please contact your advisor at Clark Nuber for further assistance.
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