Payroll Tax Credit for COVID-19 Sick and Family Leave

Payroll Tax Credit for COVID-19 Sick and Family Leave

Updated April 1, 2021
Payroll Tax Credit for COVID-19 Sick and Family Leave
Beginning in April 2020, employers were entitled to payrol
Employer Payrol Taxes and Paid Leave Tax
tax credits for paid leave required in response to the
Credits
Coronavirus Disease 2019 (COVID-19) pandemic. For
Under FFCRA, the employer payroll tax credit was
employers choosing to continue providing eligible paid
computed using qualifying wages paid, and claimed against
leave, these tax credits have been extended through
the employer’s share of the Social Security or railroad
September 2021. The paid leave mandate, however, expired
retirement payroll tax in each calendar quarter. The Social
at the end of 2020. This In Focus provides an overview of
Security trust funds were not generally affected by the tax
the tax credits for paid leave initially provided in the
credit, as a general fund transfer was provided to offset any
Families First Coronavirus Response Act (FFCRA; P.L.
reduction in trust fund revenues from the tax credit.
116-127) and later extended in the COVID-related Tax
Employers typically deposit payroll taxes with the Internal
Relief Act of 2020, enacted as Division N, Title II, Subtitle
Revenue Service (IRS) biweekly or monthly, and report
B of the Consolidated Appropriations Act, 2021 (P.L. 116-
employment taxes paid on quarterly federal tax returns filed
260) and the American Rescue Plan Act (ARPA: P.L. 117-
within 30 days of the end of the calendar quarter. All types
2).
of employers—businesses, nonprofits, and governments—
Payroll Tax Credits for Paid Sick and
generally pay the employer share of payroll taxes for their
Family Leave in FFCRA (P.L. 116-127)
employees.
FFCRA included an employer payroll tax credit for the paid
Employers claimed tax credits for FFCRA paid leave on
sick and family leave required as part of FFCRA. This tax
employment tax returns, which are generally filed quarterly
credit was intended to cover the cost to businesses of
(certain small employers may file annually). Employers
providing paid leave to address the COVID-19 pandemic.
could reduce payroll tax deposits in anticipation of
receiving paid leave tax credits. Employers could also
2020 Leave Requirement
request an advance of tax credit amounts. The tax credit
The Emergency Paid Sick Leave Act (Division E of P.L.
was refundable, meaning that if the amount of tax credits an
116-127) generally required private employers with fewer
employer claims exceeded payroll tax liability, the excess
than 500 employees, and all government employers, to
was received as a payment from the Treasury. Employers
provide employees with two workweeks of paid sick leave
claiming the credit were required to include the amount
for certain COVID-19-related leave purposes. The
claimed in gross income, for income tax purposes,
Emergency Family and Medical Leave Expansion Act
offsetting the reduction in gross income from deducting
(Division C of P.L. 116-127) generally provided employees
wages paid (preventing a double benefit). Additionally,
of private employers with fewer than 500 employees, state
employers could not claim this credit for any wages taken
and local government employees, and some federal
into account for the purposes of calculating the Section 45S
employees expanded job-protected Family and Medical
employer tax credit for paid family and medical leave.
Leave Act (FMLA) leave for certain COVID-19-related
Government employers could not claim the FFCRA tax
caregiving responsibilities. Workers using the paid sick
credits.
leave entitlement for their own needs were to be
compensated at their regular rates of pay (subject to a per-
Qualifying Sick Leave Wages
day maximum), whereas leave used for caregiving was
Under FFCRA, an employer could claim a tax credit for
partially compensated (also subject to a per-day maximum).
100% of the amount required to be paid in sick leave wages
Employers were not required to compensate workers for the
from April 1, 2020, through December 31, 2020. Sick leave
first two weeks of expanded FMLA, but after this period
wages were required to be paid for up to 80 hours (two
the leave was to be partially compensated by employers.
workweeks) for a full-time employee (prorated for part-
For both sick and family leave, the law included provisions
time employees). The maximum amount that was required
allowing employers to exclude health care providers and
to be paid to workers using FFCRA sick leave depended on
emergency responders from leave requirements, and
the purpose for which the sick leave was taken.
allowing certain small businesses an exemption from
Sick leave wages were limited to $511 per day for
providing leave for certain caregiving purposes.
employees taking leave because (1) the employee was
subject to a federal, state, or local quarantine or isolation
For more, see CRS In Focus IF11487, The Families First
order related to COVID-19; (2) the employee was advised
Coronavirus Response Act Leave Provisions, by Sarah A.
by a health care provider to self-quarantine due to COVID-
Donovan and Jon O. Shimabukuro.
19; or (3) the employee was experiencing symptoms of
COVID-19 and was seeking a medical diagnosis.
https://crsreports.congress.gov

Payrol Tax Credit for COVID-19 Sick and Family Leave
Sick leave wages were limited to $200 per day for
paid family leave for certain COVID-related childcare
employees taking leave because (a) the employee was
purposes from April 1, 2020, to March 31, 2021.
caring for an individual (with whom the employee has a
Credit Extensions in P.L. 117-2
close personal relationship) who was experiencing a
APRA provides paid leave tax credits for paid leave
situation described in number (1) or (2) above; (b) the
provided April 1, 2021, through September 30, 2021. The
employee was caring for their own minor child whose
paid leave tax credits in ARPA were similar to those
school, place of care, or caregiver was closed or unavailable
provided in FFCRA and P.L. 116-260, with a few notable
due to COVID-19; or (c) the employee was experiencing
modifications, including the following:
any other “substantially similar condition” as specified by
the Secretary of Health and Human Services.
 The 10-day limit on paid sick leave is reset for leave
taken after March 31, 2021.
The tax credit amounts for paid sick leave could be
increased by the amount employers paid for an employee’s
 The per-employee limit on qualified family leave wages
health care plan while they were on leave.
is increased to $12,000 (or 60 days for self-employed
individuals).
Qualifying Family and Medical Leave Wages
The employer tax credit for paid family leave was provided
 Paid leave credits are allowed for sick leave taken to
for employees taking leave to care for their own minor child
obtain a COVID-19 vaccine or illness related to
whose school or place of care was closed due to COVID-
immunization, or for leave taken while waiting for
19. For this component of the credit, the paid leave period
COVID-19 test results.
began after an individual had already taken 10 days of leave
 State and local governments, as well as 501(c)(1) tax-
for the family leave purpose described above. These 10
exempt federal government entities, can claim the credit.
days of leave could consist of unpaid leave, or an employee
could elect to use paid vacation, personal, or another form
 The payroll tax credit is claimed against the employer’s
of paid leave (including the FFCRA paid sick leave). After
portion of the Medicare (HI) tax (the Medicare HI trust
this 10-day period, employees could receive a benefit from
fund is not affected).
their employers that was at least two-thirds of the
 Antidiscrimination rules require that leave must be
employee’s usual pay, but not more than $200 per day. The
provided to all employees.
tax credit for family leave wages was limited to $200 per
day, and $10,000 total per employee. The tax credit
Policy Considerations
amounts for paid family leave could also be increased by
Broadly, access to paid sick leave can reduce transmission
the amount employers pay for an employee’s health care
of contagious viruses. Enhanced access to paid leave was
plan while they were on leave.
one policy intended to reduce the spread of COVID-19.
Income Tax Credit for Self-Employed Individuals
The paid leave mandate in FFCRA was not comprehensive.
Self-employed individuals, including gig workers, were
The legislation expanded access to paid sick and family
eligible for income tax credits similar to those described
leave for employees at many small and mid-sized
above. If individuals were unable to perform services in
businesses. Employees of large businesses and certain
their trade or business for the sick leave purposes described
worker groups, however, did not have guaranteed access to
above, they could qualify for an income tax credit equal to
paid sick or family leave under FFCRA.
100% of average daily self-employment income. Like the
Similarly, the tax credits provided in FFCRA were not
employer credits, this credit was limited to $511 per day for
available to all employers, nor to all employers required to
certain qualifying sick leave purposes, and $200 for other
provide leave. State and local government employers,
sick and qualified family leave purposes. The sick leave
including school districts and public colleges and
credit was limited to a maximum of 10 days (i.e., a
universities, were required to provide leave but not allowed
maximum of $5,110 per worker). The family leave credit
tax credits to offset FFCRA leave mandate compliance
was limited to 50 days (i.e., a maximum of $10,000 per
costs. ARPA allowed certain government employers
worker). For self-employed individuals, the income tax
voluntarily choosing to provide leave access to tax credits.
credit was refundable (meaning that if the tax credit amount
exceeded the individual’s income tax liability, the excess
The Joint Committee on Taxation (JCT) estimated that the
was received as a refund, or payment, from the Treasury).
paid leave tax credits in FFCRA would reduce tax revenue
Credit Extensions in P.L. 116-260
by $104.9 billion. Extending the tax credits through March
31, 2021, was estimated to reduce federal tax revenue by an
The COVID-related Tax Relief Act of 2020 extended the
additional $1.6 billion, while providing the credits from
payroll tax credits for paid leave through March 31, 2021.
April 1, 2021, through September 30, 2021 was estimated
The credits applied as if the corresponding employer
to reduce federal revenues by $6.3 billion.
mandates were also extended. The payroll tax credits for
paid leave were thus available for employers voluntarily
Additional Resource
providing qualifying paid leave through March 31, 2021.
 Internal Revenue Service, “COVID-19-Related Tax
This legislation did not modify the overall caps on the paid
Credits for Required Paid Leave Provided by Small and
leave amounts for which tax credits could be claimed. Thus,
Midsize Businesses FAQs.”
under P.L. 116-260, tax credits were limited to a total of 80
Molly F. Sherlock, Specialist in Public Finance
hours of paid COVID-19-related sick leave and 10 weeks of
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 8 · UPDATED