The Internal Revenue Service (IRS) created a new fact sheet offering guidance for small to mid-size employers wishing to leverage the refundable tax credits under the American Rescue Plan Act (ARPA). The new guidance states the tax credits will reimburse employers for the cost of offering paid emergency sick and expanded family and medical leave to employees as a result of COVID-19. This now also includes leave taken by employees to both receive the COVID-19 vaccine and to recover from any side effects. ARPA’s tax credits are against the employer’s share of the Medicare tax.

Highlights of the Fact Sheet

Here are some of the key provisions from the new fact sheet:

1. Defining “Eligible Employers”

The fact sheet defines an “eligible employer” as any business with fewer than 500 employees, including tax-exempt organizations. Governmental employers, except federal government employers, are also included.

2. Qualifying Time Period

The tax credits are applicable to wages paid for leave between April 1, 2021, and Sept. 30, 2021.

3. Paid Leave for Which Credits Can be Claimed

Eligible employers qualify for the tax credit for wages paid for employees’ leave taken when they cannot work or telework for reasons related to COVID-19, including illness, injury or any side effects from the vaccine.

4. Computing the Credit

The credit for paid sick leave is the same as wages paid for COVID-19-related time off up to two weeks, or 80 hours, and is limited to $511 per day, $5,110 total, at 100% of the employee’s typical pay. The credit for paid family and medical leave is the same as the wages paid up to 12 weeks, at $200 per day, $12,000 total, at 2/3 of the employee’s typical pay. The employer’s share of social security and Medicare (and other allocable health plan expenses and collectively bargained contributions) paid on the wages can be considered in the daily and aggregate caps.

How to Claim the Credit

To claim the credit, qualifying employers will need to report their total paid sick and family medical leave wages per quarter on their Form 941, Employer’s Quarterly Federal Tax Return. Instead of depositing the federal employment taxes, employers can keep them. This includes the federal income tax withheld from employees and the employer’s and employee’s shares of social security and Medicare taxes with respect to all employees up to the maximum amount of the credit for which the employer is eligible.

In the event an employer doesn’t have sufficient federal employment taxes saved to cover the provided leave amounts, they can request the credit in advance via Form 7200, Advance Payment of Employer Credits Due to COVID-19. Advance amounts should be noted when filing Form 941 for the applicable quarter.

If you have questions about how the new paid leave fact sheet will impact your payroll, contact DM Payroll Solutions today.