Sometimes the IRS decides to make an announcement about what might appear to be a “new” development that really is just reminding taxpayers of items that were already part of the law.  Such is the case with IRS News Release IR-2021-90[1] that discussed a tax credit available to subsidize employers who provide paid leave to employees receiving a COVID-19 vaccine or who take time off due to a reaction to the vaccine.

In this case the President decided to emphasize these credits in a speech on Wednesday[2] and many headlines implied that the program had just been created by the President.  In reality, the President was simply emphasizing the changes made to the credit for paid sick leave (now found at IRC §3131) and qualified family leave wages (now found at IRC §3132) by the American Rescue Plan Act of 2021.

The news release directs readers to a new Fact Sheet (FS-2021-09)[3] that was issued at the same time as the news release.

Changes to the Credits in the American Rescue Plan Act

The credits are based on the credits originally found in the Families First Coronavirus Response Act that was enacted in March of 2020.  The original program required small employers to offer leave in certain circumstances, but provided a payroll tax credit to offset the required leave pay and potentially a portion of health plan costs paid for by the employer.  These programs expired at the end of 2020.[4]

The original law outlined six conditions that triggered the required leave, three of which qualified for leave pay of up to $511 a day or 100% of the employee’s normal compensation (which ever was less) for the leave period, and three others which qualified for a maximum of $200 a day or 66% of an employee’s normal compensation (whichever was less).[5]

The COVID-related Tax Relief Act of 2020 §286 extended this credit into the first quarter of 2021, but dropped the mandate that employers must offer the leave.  As well, it did not increase the maximum time period per employee over which the employer could be paid the credit—generally a maximum of 80 hours for the employee except for amounts paid under the extended paid family leave.  So if an employee had used up his/her entire limit of COVID-related leave in 2020, he/she could not qualify for additional leave in the first quarter of 2021.

American Rescue Plan Act (ARPA) Extension and Expansion

The American Rescue Plan Act, enacted on March 11, 2021, extended the programs through the end of September and made additional changes effective April 1, 2021.  Some of the key changes were:

• A nondiscrimination rule applies for such a leave program to qualify for the credit.  No credit is allowed to an employer for any quarter if the employer with respect to the availability of the provision of qualified sick leave wages to which this section otherwise applies for such calendar quarter, discriminates in favor of highly compensated employees (within the meaning of IRC §414(q)), full-time employees, or employees on the basis of employment tenure with such employer.[6]

• The time period for the IRS to assess taxes related to this provision will not expire before five years from the date that is the later of:

  • The date on which the original return which includes the calendar quarter with respect to which such credit is determined is filed, or

  • The date on which such return is treated as filed under IRC §6501(b)(2).[7]

• The first 10 days of paid family leave is no longer unpaid,[8] thus allowing the maximum amount to grow to $12,000 under the program.

• Maximum leave amounts start over beginning on April 1, 2021 for both credits, so an employee can again qualify for the credit even if he/she had used up the maximum amounts under the prior two programs.[9]

• Adding new qualifying conditions to the list of those for which the employer can receive a full or partial reimbursement of paid leave and a ratable portion of medical plan expenses, to include these items:

  • The employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID–19 and such employee has been exposed to COVID–19 or the employee’s employer has requested such test or diagnosis, or

  • The employee is obtaining immunization related to COVID–19 or recovering from any injury, disability, illness, or condition related to such immunization.[10]

The news release and fact sheet emphasizes those new conditions to encourage employers to offer employees paid time off to obtain a COVID-19 vaccination and recover from reactions some individuals are having to the vaccine.[11]

Sick Leave for Which a Credit Can Be Claimed Related to the Vaccine

The fact sheet provides the following information on certain leave that can qualify for the payroll tax credit:

Eligible employers are entitled to tax credits for wages paid for leave taken by employees who are not able to work or telework due to reasons related to COVID-19, including leave taken to receive COVID–19 vaccinations or to recover from any injury, disability, illness or condition related to the vaccinations. These tax credits are available for wages paid for leave from April 1, 2021, through September 30, 2021.[12]

Note that other events that qualified for paid leave previously, such as being quarantined due to COVID-19, still qualify for the tax credit.

Amount of the Credit and How to Calculate

The fact sheet describes the amount of the credit and how it is to be calculated as follows:

The paid leave credits under the ARP are tax credits against the employer’s share of the Medicare tax. The tax credits are refundable, which means that the employer is entitled to payment of the full amount of the credits if it exceeds the employer’s share of the Medicare tax.

The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons for up to two weeks (80 hours), limited to $511 per day and $5,110 in the aggregate, at 100 percent of the employee’s regular rate of pay. The tax credit for paid family leave wages is equal to the family leave wages paid for up to twelve weeks, limited to $200 per day and $12,000 in the aggregate, at 2/3rds of the employee’s regular rate of pay. 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).[13]

Claiming the Credit

The fact sheet discusses how an employer claims the refundable credit, noting the credit is reported and can be claimed when the quarterly Form 941 is filed:

Eligible employers may claim tax credits for sick and family leave paid to employees, including leave taken to receive or recover from COVID-19 vaccinations, for leave from April 1, 2021, through September 30, 2021.

Eligible employers report their 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) for each quarter on their federal employment tax return, usually Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is used by most employers to report income tax and social security and Medicare taxes withheld from employee wages, as well as the employer’s own share of social security and Medicare taxes.[14]

However, the fact sheet notes that employers can reduce their payroll tax deposits in anticipation of having a reduced overall liability for the quarter rather than wait until the end of the quarter to receive the benefit:

In anticipation of claiming the credits on the Form 941, eligible employers can keep the federal employment taxes that they otherwise would have deposited, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes and the eligible 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. The Form 941 instructions explain how to reflect the reduced liabilities for the quarter related to the deposit schedule.[15]

Finally, the fact sheet notes that if the employer is unable to receive the full benefit of the credit by reducing payroll tax deposits, the employer can apply for an advance payment of the credit:

If an eligible employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as 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), the eligible employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will account for the amounts received as an advance when it files its Form 941, Employer’s Quarterly Federal Tax Return, for the relevant quarter.[16]

Employers Eligible for the Credit

The fact sheet provides the following discussion of employers eligible for the credit:

An eligible employer is any business, including a tax-exempt organization, with fewer than 500 employees. An eligible employer also includes a governmental employer, other than the federal government and any agency or instrumentality of the federal government that is not an organization described in section 501(c)(1) of the Internal Revenue Code.[17]

Self-Employed Individual Credit

The fact sheet also notes that a comparable credit is available for self-employed individuals:

Self-employed individuals may claim comparable tax credits on their individual Form 1040, U.S. Individual Income Tax Return.[18]

However, there is no advance payment option under this program, although the self-employed presumably could reduce their estimated tax payments (presuming they aren’t planning on relying on the prior year’s tax exception to the underpayment penalty).

In order to claim the self-employed refundable credits, the individual must be an individual who:

• Regularly carries on any trade or business within the meaning of IRC §1402 (the definition of income from self-employment) of the Internal Revenue Code of 1986, and

• Would be entitled to receive paid leave during the taxable year pursuant to the Emergency Paid Sick Leave Act if—

  • The individual were an employee of an employer (other than himself or herself), and

  • Such Act applied after March 31, 2021.[19]

The law provides that no credit will be allowed unless the taxpayer maintains such documentation as the IRS may prescribe to establish such individual as an eligible self-employed individual.[20]  The mandatory documentation standard bars the taxpayer from trying to argue for qualification based on the argument that even lacking the documentation, the taxpayer has reasonably established qualification (Cohan v. Commissioner, CA2 (1930) 39 F. 2d 540). 

Thus, advisers need to inquire of taxpayers if they have the documentation that the IRS may require in published guidance when they attempt to claim this credit.

For the self-employed the amount of the credit is the qualified sick leave equivalent amount.  That means, with regard to the self-employed individual, an amount equal to:

• The number of days during the taxable year (but not more than 10) that the individual is unable to perform services in any trade or business referred to in section 1402 of the Internal Revenue Code of 1986 for a reason with respect to which such individual would be entitled to receive sick leave if he/she were an employee, multiplied by

• the lesser of—

  • $200 ($511 in the case of any day of paid sick time described in the first three general categories), or

  • 67 percent (100 percent in the case of any day of paid sick time described in the first three categories) of the average daily self-employment income of the individual for the taxable year.[21]

The family leave for self-employed individuals is capped at the $200/67% limit per day. A day taken into account as qualified sick leave is not taken into account in determining the qualified family leave equivalent amount.[22]

Average daily self-employment income is an amount equal to:

• The net earnings from self-employment of the individual for the taxable year, divided by

• 260.[23]

At the taxpayer’s election, the net self-employment income of the prior year, rather than the current year, may be used in the above calculation.[24]

[1] “American Rescue Plan tax credits available to small employers to provide paid leave to employees receiving COVID-19 vaccines; new fact sheet outlines details,” IRS News Release IR-2021-90, April 21, 2021, https://www.irs.gov/newsroom/american-rescue-plan-tax-credits-available-to-small-employers-to-provide-paid-leave-to-employees-receiving-covid-19-vaccines-new-fact-sheet-outlines-details (retrieved April 23, 2021)

[2] “Biden offers tax credits for COVID-19 vaccination paid time off,” Reuters website, April 21, 2021, https://www.reuters.com/world/us/biden-offer-tax-credits-covid-19-vaccination-paid-time-off-2021-04-21/ (retrieved April 23, 2021)

[3] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021, https://www.irs.gov/newsroom/employer-tax-credits-for-employee-paid-leave-due-to-covid-19 (retrieved April 23, 2021)

[4] Families First Coronavirus Response Act (FFCRA) Sections 3102, 5102, 7001 and 7005

[5] FFCRA Act Sections 5102 and 5110

[6] IRC §3131(j)

[7] IRC §3121(f)(6) and IRC §3132(f)(6

[8] IRC §3132(c)(2)(B)

[9] IRC §§3131(b)(2) and 3132(b)(2)

[10] IRC §3131(c)(2)(A)(i)

[11] Personally, I did not experience any such reaction to either dose, but I do know of some people who have experienced issues for a few hours up to two days.

[12] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021

[13] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021

[14] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021

[15] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021

[16] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021

[17] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021

[18] “Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations,” IRS Fact Sheet FS-2021-09, April 2021

[19] American Rescue Plan Act of 2021 §9642(b)(1)

[20] American Rescue Plan Act of 2021 §9642(e)(1)

[21] American Rescue Plan Act of 2021 §9643(c)(1)

[22] American Rescue Plan Act of 2021 §9643(c)(4)

[23] American Rescue Plan Act of 2021 §9643(c)(1)

[24] American Rescue Plan Act of 2021 §9643(c)(2)