Under the American Rescue Plan (ARP), small businesses are eligible to claim refundable tax credits that reimburse the cost of providing paid sick and family leave due to COVID-19. This includes paid leave for employees taking time off for COVID-19 vaccinations.
Who's Eligible the ARP Tax Credit?
Employers with fewer than 500 employees, including tax-exempt organizations, are eligible. Self-employed individuals are also eligible for similar tax credits.
When is the Credit Available?
The ARP tax credits are available to eligible employers who pay sick and family leave from April 1, 2021 through September 30, 2021 for time off related to COVID-19.
What Does the Credit Cover?
ARP tax credits can be used for wages paid to employees who are not able to work or telework due to reasons related COVID-19, which includes time off for receiving or recovering from COVID-19 vaccinations.
How Much Does the Credit Cover?
For paid sick leave wages, the tax credits covers up to two weeks (80 hours) of the employee's regular rate of pay, limited to $551 per day and $5,110 in total.
For paid family leaves wages, the tax credits cover family leave wages paid for up to twelve weeks at 2/3rds of the employee's regular rate of pay, limited to $200 per day and $12,000 in total.
The amount of these 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 Do I Claim the Credit?
For most employers, the total paid sick and family leave wages (plus the eligible health plan expenses and collectively bargained contributions and the eligible employer's share of social security and Medicare taxes on the paid leave wages) is reported on Form 941, Employer's Quarterly Federal Tax Return. These are refundable tax credits and are taken against the employer's share of Medicare Tax. This means that you are entitled to payment of the full amount of credits if it exceeds your share of Medicare tax.
If you expect to claim these credits, you can keep the federal employment taxes that you would have deposited for federal income tax withheld from employees. This includes the employees' share of social security and Medicare taxes and the employer's share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. Instructions on Form 941 provides explanation on how to reflect the reduced liabilities for the quarter related to the deposit schedule.
If you do not have enough federal employment tax set aside for deposit to cover amounts provided as paid sick and family leaves wages, you may request an advance of the credit by filing a Form 7200, Advance Payment of Employer Credits Due to COVID-19. If you receive an advance, then you will account for this amount when you file Form 941 for the relevant quarter.
Need Help Claiming the ARP Credit and Filing?
At Summit Bookkeeping, we help our clients file and deposit city, state, and federal taxes. Our team of bookkeepers stay-up-date with all the recent changes and can help you take advantage of COVID-19 related loans, grants, credits, and deductions while also filing and reporting your taxes accurately. If you'd like to see how we can help you, give us a call at (360) 756-5020.
Disclaimer: This post is meant for informational purposes only and should not be taken as legal, business, or tax advice. Please consult with your accountant or bookkeeper for more information based on your specific situation. For more information, please visit https://www.irs.gov/newsroom/employer-tax-credits-for-employee-paid-leave-due-to-covid-19.