The March 2020 Families First Coronavirus Response Act (FFCRA) mandated certain COVID-19-related paid sick and/or family leaves for employees of employers having fewer than 500 employees (including self-employed individuals), and provided those employers with a fully refundable federal payroll tax credit for the wages and cost of health plan coverage for those paid leave periods. The December 2020 Consolidated Appropriations Act eliminated the mandate, but continued the availability of the credit for the first calendar quarter of 2021 for eligible employers that voluntarily provided those leaves during that quarter. 

The March 2021 American Rescue Plan Act extended availability of the credit to eligible employers (those that voluntarily provide paid leaves during the second and/or third calendar quarters of 2021), changed the credit from a credit against the Social Security tax to a credit against the Medicare tax, and made certain other changes, including two additional qualifying standards for the paid leaves. 

The IRS has now issued a fact sheet detailing the available credit for the second and third quarters, which emphasizes the additional qualifying standard regarding employee paid leaves relating to receiving and recovering from COVID-19 vaccinations. Here are the highlights of the rules applicable to Q2 and Q3:

• This fully refundable federal payroll tax credit is for eligible employers (including self-employed employers) that would have been subject to the FFCRA mandate (i.e., have fewer than 500 employees) for 2020 (not mandatory after 2020), but that voluntarily provide FFCRA paid leave during the second and third calendar quarters of 2021. 
  • The credit amount includes health plan expenses for the leave period and employer portions of Social Security and Medicare taxes paid by the employer on the leave wages. 
  • The credit can be taken on Form 941 or in advance. 
  • The limitation period on credit-related assessments has been extended to five years from the date of filing of the applicable Form 941.
• Governmental employers other than the federal government and any agency or instrumentality of the federal government that is not an organization described in Internal Revenue Code Section 501(c)(1) are included as “eligible employers.”
• Additional qualifying standards have been added for available paid sick or extended family leaves during the second and third calendar quarters of 2021:
  • The employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19, and the employee has been exposed to COVID-19 or the employee’s employer has requested such test or diagnosis.
  • The employee is obtaining immunization related to COVID-19, or is recovering from any injury, disability, illness, or condition related to such immunization.
• Tax credit amount: 
  • Paid sick leave: Up to 10 days with a daily maximum of the lesser of 100% of the employee’s regular rate of pay or $511 ($5,110 aggregate maximum). 
    • There is a re-set/re-start of the maximum paid sick leave period as of April 1, 2021 (i.e., the number of days of an employee’s previously taken FFCRA paid sick leave will not be counted after March 31, 2021, for purposes of the maximum 10 days of paid sick leave).
  • Paid family leave: Up to 12 weeks with a daily maximum of the lesser of two-thirds of the employee’s regular rate of pay or $200 ($12,000 aggregate maximum). 
  • Total maximum tax credit $17,110.
• Paid leave wages are ineligible for the credit if they are taken into account as payroll costs in connection with any of the following:
  • Covered Loan under the Paycheck Protection Program
  • Small Loan under the Small Business Act (unless the loan was not forgiven)
  • Grant under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act (i.e., a Shuttered Venue Operators Grant) 
  • Restaurant Revitalization Fund Grant 
• The credit is not available if the paid leaves discriminate in favor of highly compensated employees, full-time employees, or employees “on the basis of their employment tenure with the employer.”
• FFCRA leave credits constitute employer taxable income for federal income tax purposes.
• FFCRA leave payments are fully taxable to employees and are required to be separately identified using Box 14 of the employee’s Form W-2.

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Dana Fried, JD, LLM, Managing Director, National Tax Services

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