New Tax Credits for Employers for Coronavirus Paid Sick Leave Benefits

Sick Leave for Employees Caring for Self and Family During the Pandemic

Sick businesswoman sending email to her employee from her bedroom during coronavirus quarantine
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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.

The Emergency Paid Sick Leave Act (EPSLA) required employers to give workers up to 80 hours of paid sick time for Coronavirus-related reasons. The Expansion of the Family Medical Leave Act (Expanded FMLA) entitled workers to certain paid family and medical leave in addition to sick leave.

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.

In addition to sick and family leave during the pandemic, Congress also created an Employee Retention Tax Credit (ERC) that helps employers cover their portion of Social Security taxes. An employer can claim both sick and family leave credits as well as the ERC, but they can't claim both credits on the same portion of wages.

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

Small businesses with fewer than 50 employees are exempt from providing paid sick leave for child care or expanded family leave due to COVID-19 when it would jeopardize the viability of the business.

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.

This part of the law is an expansion of the Family Medical Leave Act (FMLA), which requires larger employers with 50 or more employees to give time off for unpaid leave and allow employees to return to work without penalty.

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.

Key Takeaways

  • The Families First Coronavirus Response Act required small and midsize employers—those with fewer than 500 employees—to provide limited paid-leave benefits to employees affected by the coronavirus emergency.
  • To pay for the new mandatory benefits, small employers are given new tax credits and federal payroll tax relief.
  • The provisions covering sick and family leave were extended again in March 2021, and they are now scheduled to expire after September 30, 2021. While the tax credits were extended, the requirement that businesses provide this leave was not—it's now optional for employers.
  • For more information and official updates, consult regularly with the IRS and U.S. Department of Labor websites.