IRS Issues Guidance on Claiming Tax Credits for COVID-19 Leave

a notepad with the words tax credit on it next to a calculator

The American Rescue Plan Act (ARPA) provided an extension to leave for qualified COVID-19 reasons and brought with it a dollar-for-dollar tax credit for certain eligible employers that voluntarily extended this benefit. The Internal revenue Service (IRS) has released a fact sheet that explains how employers can claim these tax credits. Tax credits for leave provided under provisions of ARPA are available for qualified leaves taken between April 1, 2021 and September 30, 2021.

The IRS defines eligible employers for the ARPA tax credits as:

· Businesses, including tax-exempt organizations, that voluntarily extended leave and have under 500 employees.

· Governmental employers, other than the federal government. Any agency or instrumentality of the federal government that is not an organization described in section 501(c)(1) of the Internal Revenue Code.

Qualifying Reasons for Leave:

The extension of leave and the reset bucket of up to 80 hours beginning April 1st were not the only changes. Leave under ARPA also has three (3) additional qualifying reasons (listed in bold) employees may take leave. Eligible employers are entitled to tax credit for wages paid for leave taken by employees who are not able to work or telework due to reasons related to COVID-19 as defined below:

· Employee is subject to a federal, state, or local quarantine or isolation related to COVID-19.

· Employee has been advised by a healthcare provider to self-quarantine.

· Employee is experiencing symptoms of COVID-19 AND seeking diagnosis,

· Employee is caring for an individual who is subject to quarantine or is self-quarantining.

· Employee is caring for a child whose school or place of care is closed (or a childcare provider is unavailable) due to COVID-19.

· Employee is experiencing any other substantially similar condition specified by the U.S. Secretary of Health and Human Services (HHS).

· Employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 or has been exposed to COVID-19 and is awaiting results at the employer’s request.

· Employee is obtaining immunization related to COVID-19.Employee is recovering from an injury, disability, illness, or condition related to a COVID-19 immunization.  

Amount of Tax Credits and Calculation:

Paid leave credits are provided as tax credits against the employer’s share of the Medicare tax. These credits are refundable, meaning that the employer is entitled to payment of the full amount of credits if it exceeds the employer’s share of the Medicare tax.

The tax credit will cover dollar-for-dollar wages paid for qualifying reasons up to $511 per day  for personal leave, up to 80 hours ($5,110 aggregate) and $200 per day at 2/3rds the employee’s regular rate for family leave, for up to 12 weeks ($12,000 aggregate).

The IRS fact sheet provides that, “The amount of these tax credits is increased by allocable health plan expenses and contributions for certain collectively bargained benefits, as well as the employer’s share of social security and Medicare taxes paid on the wages (up to the respective daily and total caps).”

Claiming the Credit:

Eligible employers can claim tax credits for wages paid for leave taken between April 1, 2021 and September 30, 2021.

Employers are to report their total paid sick and family wages for each quarter on their federal employment tax return, usually Form 941. The IRS states that in anticipation of claiming the credits, “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 eligible employer’s share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible.”

Employers that do not have enough federal employment taxes set aside for deposit to cover these amounts may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The employer will later account for the amounts provided in advance when they file the relevant quarter’s Form 941.

Self-employed individuals may claim comparable tax credit on their Form 1040.

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