American Rescue Plan Updates Employer Paid Sick & Family Leave Tax Credits

by | Jun 16, 2021 | Biz Taxes, COVID-19, IRS | 0 comments

Paid Sick & Family Leave Credits were enhanced under the American Rescue Plan (ARP), which was enacted in March. The credits reimburse small and mid-size (and certain governmental) employers for the cost of providing paid sick and family leave to their employees for reasons related to COVID-19, including vaccinations. The updates apply to leave taken from April 1 – September 30, 2021.

How the Credits Work

As an employer, the paid leave credits are provided as tax credits against your share of the Social Security and Medicare tax. The tax credits are refundable, which means that you are entitled to payment of the full amount of the credits if it exceeds your share of the tax. The credit is equal to:

  • The sick leave wages paid for up to two weeks (80 hours), limited to $511 per day and $5,110 in total, at 100 percent of the employee’s regular rate of pay; or
  • The family leave wages paid for up to 12 weeks, limited to $200 per day and $12,000 in total, at 2/3rds of the employee’s regular rate of pay.

Note that the amount of the 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).

How to Claim the Credit

You can claim the credits on your Form 941, Employer’s Quarterly Federal Tax Return, by keeping the federal employment taxes that you otherwise would have deposited — including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and your share of social security and Medicare taxes. The Form 941 instructions PDF explains how to do this.

If you do not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages, you may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. You will account for the amounts received as an advance when you file your Form 941 for the relevant quarter.

Note that if you are self-employed, you may claim comparable tax credits on your individual Form 1040.

If you need assistance filing for the tax credits, please contact us. We’ll be happy to help you work out all the details.

Beware of These Costly Errors When Claiming Credits

Errors on your Form 941 can be costly. If we handle the filing for you, then we’ll be responsible for any errors made. If you file the forms yourself, however, keep these tips in mind:

  • Ensure line 1 (number of employees) is accurate.
  • Report advanced credits received, not the requested payment of credits.
  • Use Form 7200 to request the advance payment of a credit only, not for reporting the credit.
  • Inform your third-party payers or reporting agents of any credits requested and received.
  • Use fractions of cents line correctly.
  • Only claim credits you are entitled to and don’t exceed the limitations.
  • Complete amended tax returns in detail and be sure they are accurate.
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  • Form 940, Employer’s Annual Federal Unemployment Tax Return
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