New Tax Credits for Employers for Coronavirus Paid Sick Leave Benefits

The Families First Coronavirus Response Act (FFCRA) was signed into law by President Trump on March 18, 2020, to help employers provide sick leave benefits to employees.

This law directly affects small and midsize employers (those with fewer than 500 employees) who give paid sick leave to employees for their own illness or to care for family members. The FFCRA also includes similar credits for self-employed individuals.

In December 2020, further legislation extended the tax credits but not the requirements for additional paid sick leave. This applied to leave taken between April 1, 2020, and March 31, 2021. In March 2021, the American Rescue Plan Act further extended these tax credits through September 30, 2021.

Employers Eligible for Tax Credits

An eligible employer is a business or tax-exempt organization with fewer than 500 employees that is required to provide emergency paid sick leave and emergency paid family and medical leave under this new law. Eligible employers can claim a refundable tax credit equal to the sick or family leave paid.

When this tax credit was extended, the language requiring businesses to provide leave was removed. Starting January 1, 2021, eligible businesses are no longer required to provide this sick and family leave, but they will receive tax credits if they choose to do so.

Employees on leave, temporary employees, and temporary employees with a continuing employment relationship are included. Independent contractors (as defined by the U.S. Department of Labor) aren't considered employees for the 500-employee threshold.

Sick Leave and Child Care Leave Benefits to Employees

Employers can receive tax credits for the following situations. Keep in mind that self-employed individuals like independent contractors are also eligible to claim these credits.

Instead of using wages to calculate the credits, self-employed individuals should use "average daily self-employment income."

Paid Sick Leave for Employees

Employees of eligible employers can get up to 80 hours (two weeks) of paid sick leave at 100%, up to $511 per day, or $5,110 in total if the employee can’t work because of one or more of these situations:

• Quarantining due to a government order
• Quarantining due to health care provider recommendation
• Experiencing COVID-19 symptoms and seeking a medical diagnosis

Paid Sick Leave for Employees as Caregivers 

In addition to the paid sick leave, employees may receive up to 80 hours (two weeks) of paid sick leave at two-thirds of their pay for one or more of these situations:

• Caring for someone in a COVID-19-related quarantine
• Caring for a child whose school or place of care (such as daycare) is closed due to COVID-19
• Experiencing “substantially similar conditions" as the two described above

The benefit to employees is up to $200 a day, or $2,000 aggregated. Part-time employees may get an amount equal to their average number of hours over a two-week period.

Paid Family Leave for Employees

The provisions covering paid family leave are nearly identical to the situations covered by paid sick leave for employees as caregivers. The rate of pay is the same—two-thirds of regular pay for a maximum daily pay of $200—and the situations covered are the same.

The primary difference is that the paid family leave rule doesn't apply to the first two weeks (10 working days). It's only after those first two weeks that the paid family leave tax credits kick in. During the first two weeks, an employee can draw on other sources of paid leave, such as paid sick leave.

After the family leave pay kicks in, it covers up to 10 weeks of work for a maximum aggregate payment of $10,000.

How to Claim the Tax Credits

You can report your qualified leave wages and related credits on your quarterly federal business tax returns (usually Form 941). This is the same form that businesses use to report FICA taxes. Form 941 has been updated for tax year 2020 to include the reporting of these credits and advances.

You don't have to wait for the IRS to process your returns to get the credit. You can instead calculate how many credits you're owed and simply withhold that amount from your quarterly federal tax returns.

If the credit you are owed exceeds the amount of those taxes, the excessive amount will be treated as an overpayment and will be refunded to you as the employer. This goes for the Employee Retention Tax Credit, as well.