January 25, 2021
Payroll Tax Credit for COVID-19 Sick and Family Leave
Beginning in April 2020, employers were entitled to payrol
full 12.4% amount). The Social Security payroll tax applies
tax credits for paid leave required in response to the
to workers’ earnings up to an annual limit: $137,700 in
Coronavirus Disease 2019 (COVID-19) pandemic. For
2020 ($142,800 in 2021). Similar taxes are withheld for
employers choosing to continue providing eligible paid
railroad employees.
leave, these tax credits have been extended through March
2021. The paid leave mandate, however, expired at the end
Employers typically deposit payroll taxes with the Internal
of 2020. This In Focus provides an overview of the tax
Revenue Service (IRS) biweekly or monthly, and report
credits for paid leave initially provided in the Families First
employment taxes paid on quarterly federal tax returns filed
Coronavirus Response Act (FFCRA; P.L. 116-127) and
within 30 days of the end of the calendar quarter.
extended in the COVID-related Tax Relief Act of 2020,
Employment payroll taxes generally are paid by all types of
enacted as Division N, Title II, Subtitle B of the
employers: businesses, nonprofits, and government
Consolidated Appropriations Act, 2021 (P.L. 116-260).
employers.
Payroll Tax Credit for Paid Sick and
Employers claim tax credits for FFCRA paid leave on
Family Leave in FFCRA (P.L. 116-127)
employment tax returns, which are generally filed quarterly
FFCRA included an employer payroll tax credit for the paid
(certain small employers may file annually). Employers can
sick and family leave required as part of FFCRA. This tax
reduce payroll tax deposits in anticipation of receiving paid
credit was intended to cover the cost to businesses of
leave tax credits. Employers can also request an advance of
providing paid leave to address the COVID-19 pandemic.
tax credit amounts. The tax credit is refundable, meaning
that if the amount of tax credits an employer claims exceeds
Leave Requirement
payroll tax liability, the excess is received as a payment
The Emergency Paid Sick Leave Act (Division E of P.L.
from the Treasury. Employers claiming the credit are
116-127) generally required private employers with fewer
required to include the amount claimed in gross income, for
than 500 employees, and all government employers, to
income tax purposes, offsetting the reduction in gross
provide employees with two workweeks of paid sick leave
income from deducting wages paid (preventing a double
for certain COVID-19-related leave purposes. The
benefit). Additionally, employers cannot claim this credit
Emergency Family and Medical Leave Expansion Act
for any wages taken into account for the purposes of
(Division C of P.L. 116-127) generally provided employees
calculating the Section 45S employer tax credit for paid
of private employers with fewer than 500 employees, state
family and medical leave. Employers may also elect not to
and local government employees, and some federal
have the credit apply. The credit does not apply to
employees expanded job-protected Family and Medical
government employers.
Leave Act (FMLA) leave for certain COVID-19-related
caregiving responsibilities. Workers using the paid sick
The Social Security trust funds will not be affected by the
leave entitlement for their own needs were to be
tax credit. A general fund transfer to the trust funds offsets
compensated at their regular rates of pay (subject to a per-
any reduction in trust funds revenues from the tax credit.
day maximum), whereas leave used for caregiving was
partially compensated (also subject to a per-day maximum).
Employer payrol tax credits of set the cost of
Employers were not required to compensate workers for the
providing COVID-19-related paid leave. Employers
first two weeks of expanded FMLA; but after this period
were required to provide COVID-19-related paid leave
the leave was to be partially compensated by employers.
from April through December 2020. In 2021, tax
For both sick and family leave, the law included provisions
credits may be available for employers choosing to
allowing employers to exclude health care providers and
provide paid leave.
emergency responders from leave requirements, and
allowing certain small businesses an exemption from

providing leave for certain caregiving purposes.
Qualifying Sick Leave Wages
Employer Payrol Taxes and Paid Leave Tax
Employers can claim a tax credit for 100% of the amount
Credits
required to be paid in sick leave wages. Sick leave wages
The employer payroll tax credit is computed using
must be paid for up to 80 hours (two workweeks) for a full-
qualifying wages paid, and claimed against the employer’s
time employee (prorated for part-time employees). The
share of the Social Security or railroad retirement payroll
maximum amount that must be paid to workers using
tax in each calendar quarter. Social Security payroll taxes
FFCRA sick leave depends on the purpose for which the
are 12.4% of wages, with 6.2% paid by employers and
sick leave is taken.
6.2% paid by employees (self-employed individuals pay the
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Payrol Tax Credit for COVID-19 Sick and Family Leave
Sick leave wages cannot exceed $511 per day for
Extension of Paid Leave Tax Credits in
employees if they are taking leave because (1) the
P.L. 116-260
employee is subject to a federal, state, or local quarantine or
The COVID-related Tax Relief Act of 2020 extended the
isolation order related to COVID-19; (2) the employee has
payroll tax credits for paid leave through March 31, 2021.
been advised by a health care provider to self-quarantine
The credits apply as if the corresponding employer
due to COVID-19; or (3) the employee is experiencing
mandates were also extended. The payroll tax credits for
symptoms of COVID-19 and is seeking a medical
paid leave are thus available for employers voluntarily
diagnosis.
providing qualifying paid leave through March 31, 2021.
Sick leave wages cannot exceed $200 per day for
The legislation does not modify the overall caps on the paid
employees if they are taking leave because (A) the
leave amounts for which tax credits can be claimed. Thus,
employee is caring for an individual (with whom the
tax credits are limited to a total of 80 hours of paid COVID-
employee has a close personal relationship) who is
19-related sick leave and 10 weeks of paid family leave for
experiencing a situation described in number (1) or (2)
certain COVID-related childcare purposes from April 1,
above; (B) the employee is caring for their own minor child
2020, to March 31, 2021.
whose school, place of care, or caregiver is closed or
Policy Considerations
unavailable due to COVID-19; or (C) the employee is
The Joint Committee on Taxation (JCT) estimated that the
experiencing any other “substantially similar condition” as
paid leave tax credits in FFCRA would reduce tax revenue
specified by the Secretary of Health and Human Services.
by $104.9 billion, the combined total for fiscal years 2020
and 2021. Extending the tax credits through March 31,
The tax credit amounts for paid sick leave can be increased
2021, was estimated to reduce federal tax revenue by an
by the amount employers pay for an employee’s health care
additional $1.6 billion, with the reduction taking place in
plan while they are on leave.
fiscal years 2021 and 2022.
Qualifying Family and Medical Leave Wages
An October 2020 study found that enhanced access to paid
The employer tax credit for paid family leave is for
leave reduced the spread of COVID-19 (see Stefan Pichler,
employees who take leave because they must care for their
Katherine Wen, and Nicolas R. Ziebarth, “COVID-19
own minor child whose school or place of care was closed
Emergency Sick Leave Has Helped Flatten the Curve in the
due to COVID-19.
United States,” in Health Affairs, at
https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2020.
For this component of the credit, the paid leave period
00863). This research is consistent with broader evidence
begins after an individual has already taken 10 days of
that access to paid sick leave can reduce transmission of
leave for the family leave purpose described above. These
contagious viruses.
10 days of leave may consist of unpaid leave, or an
employee may elect to use paid vacation, personal, or
The paid leave mandate in FFCRA was not comprehensive.
another form of paid leave (including the FFCRA paid sick
The legislation expanded access to paid sick and family
leave). After this 10-day period, employees will receive a
leave for employees at many small and mid-sized
benefit from their employers that is at least two-thirds of the
businesses. Employees of large businesses and certain
employee’s usual pay, but not more than $200 per day. The
worker groups, however, did not have guaranteed access to
tax credit for family leave wages is limited to $200 per day,
paid sick or family leave under FFCRA.
and $10,000 total per employee. The tax credit amounts for
Similarly, the tax credits provided in FFCRA were not
paid family leave can be increased by the amount
available to all employers required to provide leave. State
employers pay for an employee’s health care plan while
and local government employers, including school districts
they are on leave.
and public colleges and universities, were required to
provide leave but not allowed tax credits to offset the cost
Income Tax Credit for Self-Employed Individuals
of complying with the FFCRA leave mandate.
Self-employed individuals, including gig workers, are
eligible for income tax credits similar to those described
Additional Resources
above. If individuals are unable to perform services in their
 Internal Revenue Service, “COVID-19-Related Tax
trade or business for the sick leave purposes described
Credits for Required Paid Leave Provided by Small and
above, the individual may qualify for an income tax credit
Midsize Businesses FAQs,” available at
equal to 100% of average daily self-employment income.
https://www.irs.gov/newsroom/covid-19-related-tax-
Like the employer credits, this credit is limited to $511 per
credits-for-required-paid-leave-provided-by-small-and-
day for certain qualifying sick leave purposes, and $200 for
midsize-businesses-faqs.
other sick and qualified family leave purposes. The sick
leave credit is limited to a maximum of 10 days (i.e., a
 CRS In Focus IF11487, The Families First Coronavirus
maximum of $5,110 per worker). The family leave credit is
Response Act Leave Provisions, by Sarah A. Donovan
limited to 50 days (i.e., a maximum of $10,000 per worker).
and Jon O. Shimabukuro.
For self-employed individuals, the income tax credit is
refundable (meaning that if the tax credit amount exceeds
Molly F. Sherlock, Specialist in Public Finance
the individual’s income tax liability, the excess is received
as a refund, or payment, from the Treasury).
IF11739
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Payrol Tax Credit for COVID-19 Sick and Family Leave


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https://crsreports.congress.gov | IF11739 · VERSION 2 · NEW

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