The American Rescue Plan Act of 2021 (ARP) signed by the President on March 11, 2021, extended the Families First Coronavirus Response Act (FFCRA) and expanded the provisions for eligible employers to claim refundable tax credits to reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19.
Paid Leave Credit Period Under ARP
Under the ARP provisions, an eligible employer can claim a credit for eligible wages for the period:
April 1, 2021 through September 30, 2021.
Eligible Employers
An eligible employer includes:
- Any business (including tax-exempt organizations) with fewer than 500 employees.
- Governmental employers, other than the federal government or any agency or instrumentality of the federal government that is not an organization described in IRC section 501(c)(1).
- Self-employed individuals (the rules are different for self-employed individuals, see “Qualified Sick Leave Credit for Self-Employed’ section at the end of this article).
Eligible Paid Sick and Family Leave
Eligible employers can claim credits for wages paid for leave taken by employees who are unable to work or telework for the period April 1, 2021 through September 30, 2021 due to reasons related to COVID-19 for reasons including:
Sick Leave
- Being subject to Federal, State or local quarantine or isolation orders related to COVID-19,
- Being advised by a health care provider to self-quarantine due to concerns related to COVID-19,
- Experiencing symptoms of COVID-19 and seeking a medical diagnosis,
- Seeking or waiting for results of a diagnostic test, or medical diagnosis of COVID-19 and the employee has been exposed to COVID-19, or the employee’s employer has requested the test of diagnosis,
- Obtaining immunization related to COVID-19 or recovering from any injury, disability, illness or condition related to the immunization,
- Caring for someone who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
- Leave taken to accompany an individual to obtain immunization related to COVID-19, or to care for an individual who is recovering from any injury, disability, illness, or condition related to the immunization.
Family Leave
- Caring for a child of the employee if the school or childcare provider has been closed, or is unavailable due to COVID-19 precautions.
Tax Credit is Refundable
These tax credits are refundable credits applied against the employer’s share of the Medicare tax. Therefore, if the credit amount calculated is greater than the employer’s share of Medicare tax, the credit will generate a refund.
The Tax Credit Amount
Sick Leave: 100% of the employee’s regular rate of pay (including allocable health plan expenses, collective bargained contributions, and the employer’s share of Social Security and Medicare taxes) limited to $511 per day for up to two weeks (80 hrs) for a total of $5,110.
Family Leave: 2/3rds of the employee’s regular rate of pay (including allocable health plan expenses, collective bargained contributions, and the employer’s share of Social Security and Medicare taxes) limited to $200 per day for up to twelve weeks for a total of $12,000.
Claiming the Credit
Employers report their total paid sick and family leave wages for each quarter on their Form 941 ‘Employer’s Quarterly Federal Tax Return’.
In anticipation of claiming the credits on Form 941, eligible employers can reduce the amount of federal employment taxes that they otherwise would have paid, by the amount of the credit for which they are eligible.
An eligible employer can also request an advance of the credit amount by filing Form 7200 ‘Advance Payment of Employer Credits Due to Covid-19.’ Amounts received in advance are then reconciled on when the quarterly Form 941 is filed.
For more information on claiming these credits click here for the IRS FAQs.
Sick Leave Credit for Self-Employed
Eligible Employers
An eligible self-employed individual includes:
- An individual who regularly carries on any trade or business within the meaning of IRC section 1402 and would be eligible to receive qualified sick leave wages or qualified family leave wages if the individual were an employee of an eligible employer (other than the self-employed individual).
- Is a partner in a partnership carrying on a trade or business within the meaning of IRC section 1402.
Tax Credit is Refundable
The amount of sick leave or family leave credit for an eligible self-employed individual is applied against their federal income taxes.
Qualified Sick Leave Equivalent Amount
For an eligible self-employed individual who is unable to work because the individual:
- Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19
- Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19, or is:
- Experiencing symptoms of COVID-19 and seeking a medical diagnosis,
- Seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and the individual has been exposed to COVID-19 or is unable to work pending the results of the test or diagnosis, or
- Obtaining immunization related to COVID-19 or recovering from any injury, disability, illness, or condition related to the immunization.
The qualified sick leave amount is equal to: the number of days (up to a maximum of 10) that the individual cannot perform services in any trade or business, multiplied by the lesser of $511 or 100% of the ‘average daily self-employed income.’
For an eligible self-employed individual who is unable to work because the individual is:
- Caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
- Caring for a child if the child’s school or place of care has been closed, or childcare provider is unavailable due to COVID-19 precautions, or
- Experiencing any other substantially similar condition specified by the Secretary of HHS in consultation with the Secretary of the Treasury and the Secretary of Labor. The Secretary of HHS has specified, after consultation with the Secretaries of Treasury and Labor, that a substantially similar condition is one in which the employee takes leave:
- to accompany an individual to obtain immunization related to COVID-19, or
- to care for an individual who is recovering from any injury, disability, illness, or condition related to the immunization.
The qualified sick leave amount is equal to: the number of days (up to a maximum of 10) that the individual cannot perform services in any trade or business, multiplied by the lesser of $200 or 67% of the ‘average daily self-employment income.’
Average Daily Self-Employment Income
The average daily self-employment income is an amount equal to the net earnings from self-employment for the taxable year, or prior taxable year, divided by 260.
Qualified Paid Family Leave Equivalent Amount
The qualified family leave equivalent amount is equal to the number of days (up to a maximum of 60) that the self-employed individual cannot perform services for which that individual would be entitled to paid family leave if the individual were employed by an Eligible Employer )other than the self-employed individual), multiplied by the lesser of $200 or 67% of the ‘average daily self-employment income.’
Claiming Both Paid Sick Leave and Paid Family Leave Equivalent Amounts and Credits
An eligible self-employed individual is entitled to a refundable credit for a qualified sick leave equivalent amount and also to receive qualified sick leave wages as an employee. However, the amount of the sick leave credit must be reduced by the sum of the qualified sick leave equivalent wage and credit amount that exceeds $5,110.
For Example:
Taxpayer A received $4,000 in qualified sick leave wages in their capacity as an employee.
Taxpayer A is eligible to claim qualified sick leave credits of $3,300 in their capacity as an employer.
The total combined benefit is $7,300.
The excess of the combined qualified sick leave wages and credits over $5,110 is $2,190
Therefore, the qualified sick leave credit of $3,300 must be reduced by $2,190 resulting in a credit of $1,110.
Similarly, an eligible self-employed individual is entitled to a refundable credit for a qualified family leave equivalent and also to receive qualified family leave wages as an employee. However, the amount of the family leave credit must be reduced by the sum of the qualified sick leave equivalent wage and credit amount that exceeds $12,000.
For Example:
Taxpayer B received $8,000 in qualified family leave wages in their capacity as an employee.
Taxpayer B is eligible to claim qualified family leave credits of $4,500.
The total benefit is $12,500.
The excess of the combined qualified family leave wages and credits over $12,000 is $500.
Therefore, the qualified leave wages must be reduced by $500 resulting in a credit of $4,000.
For more information related to claiming these credits for a self-employed individual click here for the IRS FAQs.
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