New COVID-19 Paid Leave Tax Credits for 2021

by Prof. Robert Bloink and Prof. William H. Byrnes

President Biden signed the fifth major piece of COVID-19-related legislation into law late last week. The American Rescue Plan Act (ARPA) added two new payroll tax credit provisions to the IRC, which essentially extend the credits for paid leave enacted in March 2020 under the FFCRA, as extended by the CAA. The law does, however, make significant changes that could impact the value of the tax credits beginning April 1, 2021. Small business clients should remember that offering paid leave is no longer mandatory. However, those who continue to offer paid leave to their employees do remain eligible for valuable tax benefits—and need to know the facts as the law governing these credits continues to change over time.

FFCRA Tax Credits: Background

The Families First Coronavirus Response Act (FFCRA) paid leave requirements were technically allowed to expire after 2020. However, employers who opted to continue paying wages to employees who missed work for eligible reasons remained entitled to a tax credit for the qualifying wages paid during the first months of 2021.

The basic provisions of the FFCRA paid leave credits remain unchanged under the ARPA—of course, with the notable exception that paid leave is no longer mandatory. In other words, the credit for paid sick leave is capped at $511 per day (with an overall per-employee cap of $5,110) for employees who cannot go to work or telecommute because they (1) are experiencing COVID-19 symptoms and seeking a diagnosis, or (2) are subject to government-mandated quarantine or a recommendation to self-quarantine.

The additional paid sick leave is capped at 2/3 of the employee's pay rate, subject to a maximum $200 cap per day (or $2,000 total) if the employee (1) is caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing "substantially similar conditions" specified by the Secretary of Health and Human Services (HHS).

Under the original FFCRA rules, the additional paid family leave provisions offered up to 12 weeks of leave (with the first two unpaid, and the remaining paid at 2/3 of the employee's regular rate, capped at $200 per day or $10,000 total).

The amount of the credit can also be increased by the amount of the employee’s qualified health expenses paid for by the employer.

ARPA Changes

The modifications made by the ARPA apply to wages paid for leave taken between April 1, 2021 and September 30, 2021. As under prior law, they are available to employers with fewer than 500 employees. In other words, the new credit rules take effect after the existing FFCRA credit rules expire.

However, the ARPA also modifies existing law so that the credits will now be available in additional situations. The definitions of qualified family leave wages and qualified sick leave wages are expanded to include wages paid to (1) employees waiting for the results of a COVID-19 test or medical diagnosis of COVID-19 if the employee was exposed to COVID-19 or the employer requested the test and (2) employees who are obtaining COVID-19 vaccines or recovering from any injury, disability, illness or other condition related to the immunization.

Under the ARPA rules, the credits can be increased by the employer’s portion of the Social Security tax (6.2%) and the employer’s Medicare tax obligations (1.5%) paid on qualified leave wages. The wages, however, are not excluded from employer Social Security tax obligations.

The ARPA also removes the 10-day unpaid exclusion period for family leave, meaning that employers may provide paid family leave immediately and still claim the credit. The cumulative cap on employee wages eligible for the credit was increased to $12,000 in recognition of this new rule.

Treasury can also waive penalties on failure to make employment tax deposits if the failure was in anticipation of claiming the credit.

Employers can claim the credits even if they've received a Paycheck Protection Program (PPP) loan, but cannot claim the credit with respect to wages paid with forgiven PPP funds. The same is true if the business used funds forgiven under another recovery relief provision, such as a restaurant revitalization grant.

Under the ARPA, employers cannot claim the credit if they make paid leave time available in a discriminatory manner—in other words, one that favors highly-compensated employees under IRC Section 414(q), full-time employees or those who have worked for the employer for a certain length of time.

The law also “resets” the 10-day limitation period for the maximum number of days for which the employer can claim the paid sick leave credit for wages paid to an employee (the reset happens after March 31, 2021 for employees and January 1, 2021 for self-employed taxpayers).

Conclusion

The modifications to the paid leave credits are detailed. Small business clients should be advised to consult with tax advisors to maximize the available value of the credit moving through 2021.