In March 2020, Congress enacted the Families First Coronavirus Response Act (FFCRA), which required employers with fewer than 500 employees to provide paid sick and family leave to employees affected by COVID-19. This Act also included credits for employers to help alleviate the cost of such leave. While the provisions from the FFCRA expired on December 31, 2020, the American Rescue Plan Act of 2021 (ARP) extended the tax credits for employers who provide such leave voluntarily from January 1, 2021 through September 30, 2021 and included additional reasons for which employers may qualify for the credit.
Who is eligible for the tax credit?
An eligible employer is any business, including a tax-exempt organization and self-employed individuals, with fewer than 500 employees. All members of a controlled group should be included when determining eligibility.
In addition to the eligible paid leave under FFCRA, these credits are now available to employers who provide paid leave taken to receive COVID-19 vaccinations or to recover from such vaccination. These tax credits are available for wages paid for leave from April 1, 2021 through September 30, 2021.
The paid credits under the ARP are refundable tax credits against the employer’s share of Medicare tax.
How is the tax credit calculated?
Similar to the FFCRA, the ARP tax credit is calculated as follows:
- Paid sick leave credit equals wages paid for COVID-19 reasons for up to 80 hours
- $511 per day limit ($5,110 in aggregate) at 100 percent of employee’s regular rate
- Paid family leave credit equals wages paid for up to twelve weeks
- $200 per day limit ($12,000 in aggregate) at two third of employee’s regular rate
- Credit is increased by allocable health plan expenses and contributions for certain collectively bargained benefits and employer’s share of Social Security and Medicare taxes paid on the wages, up to the respective daily and total caps
How do I claim the tax credit?
The credit is claimed on Form 941. An advance credit may be requested in certain circumstances by filing form 7200. Self-employed individuals may claim comparable credits on their individual Form 1040.
Over the past 12-plus months the various stimulus packages have included many different incentives. If you have taken advantage of such incentives, careful consideration should be taken to ensure you understand how the different rules coordinate with each other and what the impact may be. For instance, you cannot take a credit for wages included in a PPP loan forgiveness application.
Although the pandemic has placed a lot of human and economic strain on many businesses, the American Rescue Plan Act of 2021 represents a valuable opportunity to offset some of those losses and get businesses back on the road to recovery. If you have questions about the information outlined in this article or need assistance with a tax or accounting issue, we can help. For additional information, call us at 248.208.8860 or contact us today.