April 29, 2021

COVID-19 Tax Credits May Be Available

The IRS updated its guidance last week, which indicates that many state and local governmental bodies such as municipalities, may now be eligible to claim a tax credit to cover the cost of voluntarily providing paid leave for COVID-19 related reasons from April 1, 2021, through September 30, 2021.

This guidance is based on the American Rescue Plan Act of 2021 (ARP) signed by President Biden on March 11, 2021. The ARP does not mandate paid leave for COVID related reasons; however, as stated above, it does provide tax credits for employers who voluntarily provide the leave. At the time the legislation was enacted, it was unclear whether the expanded provisions included local governments, but the IRS now states that “any business, including a tax-exempt organization, with fewer than 500 employees,” and also “a government employer, other than a federal government and any agency or instrumentality of the federal government that is not an organization described in section 501(c)(1) of the Internal Revenue Code.” It does not appear that the 500- employee threshold applies to governmental employers.

Under the following circumstances, the tax credit can be used for wages paid to employees during April 1, 2021, through September 30, 2021.

  • Leave taken by an employee who is not able to work or telework due to reasons related to COVID-19, or they are awaiting the results of a COVID-19 test or diagnosis because:
    • The employee was exposed to COVID; or
    • The employer requested the test or diagnosis.
  • Employee is obtaining a COVID-19 vaccine.
  • Employee is recovering from any injury, disability, illness, or condition related to a COVID-19 vaccine.

The benefits provisions under the ARP have expanded from what was originally offered under the Families First Coronavirus Response Act last year. First, the ARP allowed a voluntary reset of the 10-day limit for emergency paid sick leave beginning April 1, 2021. In its guidance the IRS states “the tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons for up to two weeks (80 hours), is limited to $511 per day and $5,110 in the aggregate, at 100 percent of the employee's regular rate of pay.”

In addition to the leaves listed above, the tax credit is also available for Emergency Family and Medical Leave (EFMLA), which can be offered to an employee to care for a child whose school is closed or whose regular caretaker is unavailable due to COVID-19. The ARP expanded this leave to include employer paid leave for the first two weeks of EFMLA and for those employers to receive the tax credit for that period. This increased the tax credit for paid family leave wages from no more than 10 weeks to a maximum of 12 weeks. The wages are capped to $200 per day and $12,000 in the aggregate, and at 2/3 of the employee's regular rate of pay.

To claim the tax credit, the IRS states that eligible employers should “report their total paid sick and family leave wages for each quarter on their federal employment tax return, usually Form 941.” Employers can also request an advance refund for tax credits using Form 7200.

Since cities may now qualify for this tax exemption, they should discuss it with their CPA to verify qualification and next steps. Cities should also adopt policies to match their practice. For a sample policy or questions on this or other personnel matters, contact Andrea Shindlebower Main, personnel services manager or Justin Hocking, personnel services attorney.