The American Rescue Plan Act of 2021 (ARP) allows small and midsize employers—even certain governmental employers—to claim tax credits that reimburse the cost of providing paid sick and family leave related to COVID-19 to their workers.
The refundable credits can include the leave taken by employees to receive or to recover from COVID-19 vaccinations. The credits are available for such leave from April 1 through September 30.
The IRS has released a fact sheet that gives additional details about the credits and the employers who qualify for them, as well as directions on how to claim the credits.
The Internal Revenue Service says the credits are available to businesses and tax-exempt organizations that have less than 500 employees, giving them a credit for the paid time off they provide each employee getting the COVID-19 vaccine—and for any time they need to recover from the vaccine.
If an eligible employer offers employees a paid day off to get vaccinated, for example, the employer is qualified to get a tax credit that’s equal to the wages paid to the employees for that day. There are limits, of course.
“This new information is a shot in the arm for struggling small employers who are working hard to keep their businesses going while also watching out for the health of their employees,” said IRS Commissioner Chuck Rettig. “Our work on this issue is part of a larger effort by the IRS to assist the nation recover from the pandemic.”
The paid leave credits in the American Rescue Plan specifically target the employer’s share of Medicare tax. Since the credits are refundable, an eligible employer can be refunded the full amount of the credit if it’s more than the amount of their Medicare tax.
The IRS says the credits can be claimed on Form 941, Employer’s Quarterly Federal Tax Return, outlining two situations involving eligible employers:
- In anticipation of claiming the credits on the Form 941, 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. The Form 941 instructions explain how to reflect the reduced liabilities for the quarter related to the deposit schedule.
- If an eligible employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages (plus the eligible health plan expenses and collectively bargained contributions and the eligible employer's share of social security and Medicare taxes on the paid leave wages), the eligible employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will account for the amounts received as an advance when it files its Form 941, Employer's Quarterly Federal Tax Return, for the relevant quarter.
The IRS closes the release by reminding that a comparable benefit is available to self-employed taxpayers, who would file Form 1040, U.S. Individual Income Tax Return to claim the credits.
Sources: American Rescue Plan tax credits available to small employers to provide paid leave to employees receiving COVID-19 vaccines; Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations.