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Paid Leave Credits Have Been Extended – How Will They Affect Your Client’s Tax Plan in 2021?

The Families First Coronavirus Response Act (FFCRA) was the very first COVID-19 relief bill passed by the Trump Administration. The FFCRA was signed into law on March 18, 2020 and was followed closely by a much larger bill, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Although the CARES Act gets the most press, the FFCRA provided noteworthy benefits to working taxpayers and business owners.

Under the FFCRA, workers were guaranteed paid leave, and businesses were given tax credits for providing that paid leave. The paid leave requirements expired at the end of 2020, but businesses can continue to receive credits into 2021 if they voluntarily offer those benefits to their employees. Whether your client is a worker or an employer, you can discuss the FFCRA benefits with them at your next tax planning meeting and can even incorporate these benefits into their tax plan in 2021.

Paid Sick Leave Requirements

The FFCRA required certain businesses to provide paid leave for their workers who were suffering during the COVID-19 pandemic. Beginning April 1, 2020 and through the end of 2020, the FFCRA required employers to provide the following paid sick leave:

  • Two weeks of paid sick leave (or up to 80 hours) at 100% of the employee’s rate of pay if they were unable to work because they were required to quarantine or were experiencing COVID-19 symptoms and were awaiting a diagnosis, up to a maximum of $511 per day; or
  • Two weeks of paid sick leave (or up to 80 hours) at two thirds of the employee’s rate of pay if they were unable to work because they were caring for an individual who was quarantining or caring for a child whose school or care facility was closed related to COVID-19, up to a maximum of $200 per day.

Expanded Family and Medical Leave

The law also expanded the Family and Medical Leave Act (FMLA). Beginning April 1, 2020 and ending December 31, 2020, leave under the FMLA included employees who took time off to care for a child whose school or care facility closed due to COVID-19.Typically, leave under the FMLA is unpaid, but the FFCRA required businesses to pay for up to 10 weeks of leave when parents take time off to care for their child in this scenario. Their first two weeks of leave under the FMLA was unpaid (unless the employee elected to use paid sick leave or PTO), but over the 10 weeks that followed, businesses were required to pay their workers two thirds of their standard rate of pay but no more than $200 per day, with a maximum benefit of $10,000 per employee.

Paid Leave Tax Credits

To make the paid leave requirements more palatable for businesses, employers were eligible for credits  z. When businesses paid workers under either (1) the paid sick leave provisions or (2) the expanded FMLA leave, they could receive a dollar-for-dollar credit for all eligible wages paid. Initially the FFCRA provided credits for eligible wages paid between April 1, 2020 and December 31, 2020, but the eligibility period has since been extended – twice.

One of the large coronavirus relief efforts of the Trump administration, the Consolidated Appropriations Act of 2021 (CAA), which was passed in December 2020, extended these paid leave credits through March 31, 2021. This law did not extend the requirement that businesses provide paid leave; it simply rewarded employers for voluntarily providing it.

Only a few months later, in March of 2021, the Biden administration passed its first large coronavirus relief bill: the American Rescue Plan Act (ARPA) of 2021. The ARPA extended the eligibility period until September 30, 2021, but it also expanded the benefits

  • The ARPA reset the limit on paid sick leave. Businesses can pay for another two weeks (or 80 hours) of sick leave for their employees when that leave is taken between April 1, 2021 and September 30, 2021.
  • The ARPA also expanded the paid leave provided under the new FMLA provision. Instead of a $10,000 per-employee maximum, the tax bill allowed businesses to pay up to $12,000 to employees who requested leave between April 1, 2020 and September 30, 2021.
  • The bill also allowed individuals to take sick leave to get immunized, or while waiting for testing results.
  • Businesses that were previously excluded from the credits, like state and local governments and 501(c)(1) nonprofit entities, can now claim the credit.

How the Paid Leave Credit Works

The paid leave credits are taken against your client’s payroll taxes, specifically their share of Social Security taxes. They should be claimed on your clients’ payroll tax returns, which are typically filed quarterly. Claiming these credits against payroll taxes (rather than income taxes) allows your clients to access the credits not long after they provide the paid leave for their employees. Not only that, but the tax credit is refundable, which means that even if your clients don’t have enough Social Security taxes in the quarter that they claim the credit, they can receive a refund of future Social Security taxes from the Treasury.

The credits they receive are includable in gross income, but this income is offset by the deduction they take for the wages paid to employees on sick for family leave.

More Details About Credit Eligibility

If your client is a small or medium sized employer, they likely qualify for these credits under the FFCRA. In general, private employers with fewer than 500 employees and certain governmental employers will qualify.But there’s one thing you do need to keep in mind: if your client is using wages to help them qualify for the employee retention credit (ERC) or Paycheck Protection Program (PPP) loan forgiveness, you’ll need to do a bit of research to make sure they can qualify for multiple programs. Though your client can likely qualify for more than one (and perhaps all three), they will not be able to use the same wages to qualify for more than one.

How These Benefits Affect Tax Planning

The FFCRA tax credits are payroll tax credits, so they will not directly affect your client’s income tax returns. But the cash savings that they collect might have an indirect effect on their tax position. For example, if your clients want to purchase a new piece of equipment, the payroll taxes they save under the FFCRA might provide them with the capital that they need to make a large purchase. Those purchases could be well-timed to take advantage of 100% bonus depreciation this year, which is only available through 2022.If your clients want to leverage their FFCRA savings on a property purchase, our Corvee Tax Planning software can show them exactly how that investment will affect their income taxes in 2021. Our software is unique in that it gives your clients an easy-to-read deliverable that compares the effects of different tax planning strategies, which is great for a client’s tax plan in 2021. If you want to see how our software works and see how it can help you provide your client with an even better tax planning service, contact us today for a demo.

Tax Plan 2021: Corvee is Ready, Are You?

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