100% Tax Credit For Paying Qualified Leave Due To Covid

Business owners considers claiming the 100% refundable tax credit for paying sick leave and family leave wages due to covid-19

As COVID-19 began spreading rapidly across the country, legislators went to work preparing the Families First Coronavirus Response Act (FFCRA). This Act became law on March 18, 2020, and it created a 100% refundable tax credit for employers that paid qualified leave to employees. The COVID-related Tax Relief Act of 2020 extended the credit to March 31, 2021.

Most recently, the American Rescue Plan Act of 2021 (ARPA) extends the tax credit to Sept. 31, 2021, and makes a few additional changes. In this blog post, we’ll cover three key points: paid sick leave, family and medical leave, and the 100% refundable tax credit you can claim for paying either type of leave.

Emergency paid sick leave

According to the FFCRA, employers were required to provide up to two weeks – or 10 days – of paid sick leave to employees at their regular rate of pay up until Dec. 31, 2020. The COVID-related Tax Relief Act allowed employers to voluntarily pay sick leave wages and claim the credit through March 31, 2021.

Under the ARPA, employers aren’t required to provide emergency paid sick leave. It’s voluntary. In addition, the ARPA resets the 10 days (80 hours) of paid sick leave employees can use between April 1, 2021, and Sept. 30, 2021. Full-time employees can receive their regular rate of pay up to 80 hours. For part-time employees, the paid sick leave they can receive is equal to the average number of hours they work in two weeks.

Employees can receive paid sick leave for any of the following reasons:

Receiving a positive diagnosis for COVID-19
Experiencing the symptoms of COVID-19 or self-quarantining per a health care provider’s recommendation
Following federal, state, or local orders to self-quarantine or isolate
NEW | Getting or awaiting the results of a COVID-19 diagnosis or test if the employee was exposed or the employer requested the test or diagnosis
NEW | Obtaining a COVID-19 vaccine
NEW | Recovering from an illness or condition after receiving the COVID-19 vaccine

The amount of paid sick leave employees receive can’t exceed $511 per day or $5,110 total.

In addition, employers may elect to provide up to 10 days of paid sick leave to employees at two-thirds of their rate of pay if employees are unable to work because they’re:

Caring for an individual who’s in isolation or quarantine as recommended by a health care provider
Unable to work because their child’s school or place of care closes as a result of COVID-19
Experiencing a substantially similar condition to COVID-19, which the Secretary of Health and Human Services specifies

In these instances, the amount of paid sick leave employees receive can’t exceed $200 per day or $2,000 total.

Employers can’t require that employees use other forms of paid leave first. All employees, regardless of how long they’ve been employed, are eligible for emergency paid sick leave.

View the IRS FAQ for more information on the expansion of the paid sick and family leave tax credits.

Emergency family and medical leave

The FFCRA expanded the Family and Medical Leave Act of 1993 (FMLA). Under this expansion, employers were required to provide employees with up to 12 weeks of emergency family and medical leave – 10 of which must be paid – if an employee is unable to work because their child’s school or place of care is closed as a result of COVID-19. This requirement expired on Dec. 31, 2020, but again, the COVID-related Tax Relief Act extended the credit to March 31, 2021.

Under the ARPA, employers can voluntarily provide employees with up to 12 weeks of emergency family and medical leave starting April 1, 2021.

The ARPA allows employees to receive pay over the entire 12-week period. The rate of pay is two-thirds the regular rate of an employee’s pay, up to $200 per day and $12,000 total. Employees are eligible to receive emergency family and medical leave for any of the following reasons:

Receiving a positive diagnosis for COVID-19
Experiencing the symptoms of COVID-19 or self-quarantining per a health care provider’s recommendation
Following federal, state, or local orders to self-quarantine or isolate
NEW | Getting or awaiting the results of a COVID-19 diagnosis or test if the employee was exposed or the employer requested the test or diagnosis
NEW | Obtaining a COVID-19 vaccine
NEW | Recovering from an illness or condition after receiving the COVID-19 vaccine

Who qualifies as an eligible employee?

Any employee who has been employed for at least 30 days can qualify for this extended leave. However, certain employers may choose not to provide paid sick leave and family leave to employees who are health care providers or emergency responders. Employers with 50 or fewer employees are exempt from providing expanded leave if it jeopardizes the viability of their business.

It’s possible for an employee to use both types of leave – paid sick leave and the expanded family and medical leave. If they do, they would receive a maximum of 14 weeks of paid leave.

Tax credit under the FFCRA

The FFCRA provides a 100% refundable tax credit for employers – including self-employed individuals – who pay sick leave and expanded family and medical leave for COVID-19 related reasons. Businesses and tax-exempt organizations that employ fewer than 500 employees are eligible for the credit. You have fewer than 500 employees if, at the time an employee’s leave is taken, you employ fewer than 500 full-time and part-time employees within the US.

The credit is a dollar-for-dollar reimbursement. It covers 100% of up to 80 hours of the qualified sick leave wages and up to 10 weeks of the qualified family leave wages paid for leave taken between April 1, 2020, and March 31, 2021.

Tax credit under the ARPA

Starting April 1, 2021, the ARPA will also provide a 100% refundable tax credit for employers who pay sick leave and family and medical leave. Similar to the credit under FFCRA rules, it has the same eligibility criteria for businesses and tax-exempt organizations. It covers 100% of up to 80 hours of the qualified sick leave wages and up to 12 weeks of the qualified family leave wages paid for leave taken from April 1, 2021, to Sept. 30, 2021.

When calculating the credits, employers can include qualified health plan expenses and their share of Medicare tax on those wages.

How to claim the tax credit

Eligible employers may claim the tax credits each quarter on their federal employment tax returns – Form 941, Employer’s Quarterly Federal Tax Return. Another option for employers is to keep the federal employment taxes they would have deposited up to their eligible credit amount. These taxes include federal income tax withheld from employees, plus the employer’s and employees’ share of social security and Medicare taxes. Here’s additional information from the IRS on how to claim the credit.

How to report paid sick leave and family leave

This is the reporting guidance from the IRS as of Jan. 29, 2021. No additional information has been released to address changes in the ARPA.

The IRS requires employers to report the qualified sick and family leave payments made to employees in box 14 of Form W-2 or in a separate statement. Employers must separately state:

the total amount of qualified sick leave wages paid because the employee was quarantined or diagnosed with COVID-19;
the total amount of qualified sick leave wages paid because the employee was caring for someone sick with COVID-19; and
the total amount of qualified family leave wages paid.

The IRS recommends employers use the following language when issuing Form W-2 or statements to employees. Employers can modify it as necessary.

“Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act. Specifically, up to three types of paid qualified sick leave wages or qualified family leave wages are reported in Box 14:

Sick leave wages subject to the $511 per day limit because of care you required;
Sick leave wages subject to the $200 per day limit because of care you provided to another; and
Emergency family leave wages.

If you have self-employment income in addition to wages paid by your employer, and you intend to claim any qualified sick leave or qualified family leave equivalent credits, you must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with your income tax return and reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages. If you have self-employment income, you should refer to the instructions for your individual income tax return for more information.”

View IRS Notice 2020-54 for more information on how to report paid sick and family leave.

Additional resources on this tax credit

Originally published 3/27/2020. Updated 7/30/2021.

Have questions about how to claim the tax credit for paying qualified sick and leave wages? Let’s talk.

There’s A 100% Refundable Tax Credit For Paying Qualified Leave Because Of Covid