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Taking Advantage of Tax Credits for Paid Leave Related to COVID-19

  • Employers can claim tax credits for paid leave offered between April 1 and Sept. 30 for reasons related to COVID-19
  • Qualifying purposes range from illness to caring for a child due to the closure of a school or child care facility
  • Credits of up to $12,000 per employee are available

Summary by Dirk Langeveld

Through the end of the month, employers can take advantage of paid leave offered to employees in the second and third quarter of the year to get the COVID-19 vaccine, care for others due to COVID-19, or other qualifying circumstances.

The tax credits were first created under the Families First Coronavirus Response Act before being extended by the Tax Relief Act of 2020 as well as the American Rescue Plan. They were also expanded this past summer to apply to paid leave offered for a broader range of scenarios.

Employers can claim credits for paid leave offered between April 1 and Sept. 30 of this year. The credits are available to businesses with fewer than 500 employees, and are claimed against an employer’s share of payroll taxes. The credits apply to paid leave offered to employees who are:

  • Under federal, state, or local quarantine or isolation due to COVID-19, or are taking this precaution on the advice of their health care provider
  • Quarantining due to COVID-19 symptoms or exposure to someone who tested positive for the virus
  • Receiving a COVID-19 vaccine or recovering from its side effects
  • Caring for a family member who is quarantining due to COVID-19
  • Caring for a child due to the closure of their school or child care facility, or because a child care provider is unavailable due to COVID-19 concerns

Employers can calculate tax credits in one of two ways. The first is for an employee’s full wage, capped at $511 a day, for up to 80 hours of leave. This amount is limited to $5,110, and is applicable to employees who received leave because they were sick, quarantining, awaiting the results of a COVID-19 test, getting the COVID-19 vaccine, or recovering from the vaccine’s side effects.

Employers can also claim a credit for paid family leave for workers who were caring for someone in quarantine or providing child care. These credits are capped at two-thirds of an employee’s regular wage, up to $200 a day and $12,000 in aggregate, over a 12-week period.

Businesses can also claim credits for certain other expenses, such as health plan expenses and contributions for certain collectively bargained benefits. If the credit exceeds the employer’s share of payroll taxes, the amount is refunded.

Paid leave contributions are reported on each quarter of federal employment tax returns, usually Form 941. Businesses can also file Form 7200 to request an advance of credits if they do not have enough set aside to cover the amounts provided as paid leave. The Internal Revenue Service has provided extensive guidance on issues such as who qualifies for the credits, how much a business will qualify for, and how employers should substantiate eligibility for the tax credits.

Companies can review their existing paid leave policies, update them to incorporate IRS guidance, and let employees know about the availability of paid leave. They should also make sure their company qualifies for the credits and ensure that they receive the necessary documentation from employees to qualify for the credits.

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