New Tax Credits Support Paid Leave for COVID Vaccine

April 23, 2021Alerts

For many employers, the costs related to the COVID-19 vaccine just went down.

On April 21, 2021, President Biden announced that employers with fewer than 500 employees – including tax exempt organizations – can claim a refundable tax credit for paid sick and family leave provided to employees on account of COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations. The leave taken must be for the period from April 1, 2021, through September 30, 2021.

The tax credit applies to wages (subject to caps) paid for leave taken by employees who are not able to work or telework due to reasons related to COVID-19. This includes leave taken to receive COVID–19 vaccinations or to recover from any injury, disability, illness or condition related to the vaccinations.

Tax credit amounts and how they are calculated

The paid leave credits are taken 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 even 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 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 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 two-thirds of the employee's regular rate of pay. The amount of the tax credit 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).

Claiming the credit

Eligible employers report 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) for each quarter on their federal employment tax return, usually Form 941, Employer's Quarterly Federal Tax Return PDF. 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.

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.

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 (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.

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