Congressional Research Service IF11739.8 (Payroll Tax Credit for COVID-19 Sick and Family Leave)

Summary

A Congressional Research Service product, IF11739 (version 8), updated April 1, 2021, on payroll tax credits for COVID-19 sick and family leave. It states that beginning in April 2020 employers were entitled to payroll tax credits for paid leave required in response to the pandemic, and that for employers choosing to continue providing eligible paid leave the credits have been extended through September 2021, while the paid leave mandate expired at the end of 2020. It gives an overview of the credits as first provided in the Families First Coronavirus Response Act (FFCRA) and later extended in the COVID-related Tax Relief Act of 2020 and the American Rescue Plan Act. It explains that under FFCRA (P.L. 116-127) the credit was claimed against the employer's share of the Social Security or railroad retirement payroll tax.

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Updated April 1, 2021
Payroll Tax Credit for COVID-19 Sick and Family Leave
Beginning in April 2020, employers were entitled to payroll Employer Payroll 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
B of the Consolidated Appropriations Act, 2021 (P.L. 116- Revenue Service (IRS) biweekly or monthly, and report
260) and the American Rescue Plan Act (ARPA: P.L. 117- employment taxes paid on quarterly federal tax returns filed
2). within 30 days of the end of the calendar quarter. All types
of employers—businesses, nonprofits, and governments—
Payroll Tax Credits for Paid Sick and generally pay the employer share of payroll taxes for their
employees.
Family Leave in FFCRA (P.L. 116-127)
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
Payroll 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
close personal relationship) who was experiencing a Credit Extensions in P.L. 117-2
APRA provides paid leave tax credits for paid leave
situation described in number (1) or (2) above; (b) the
employee was caring for their own minor child whose provided April 1, 2021, through September 30, 2021. The
school, place of care, or caregiver was closed or unavailable paid leave tax credits in ARPA were similar to those
due to COVID-19; or (c) the employee was experiencing provided in FFCRA and P.L. 116-260, with a few notable
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
by $104.9 billion. Extending the tax credits through March
Credit Extensions in P.L. 116-260 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
hours of paid COVID-19-related sick leave and 10 weeks of Molly F. Sherlock, Specialist in Public Finance
IF11739

https://crsreports.congress.gov
Payroll Tax Credit for COVID-19 Sick and Family Leave

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https://crsreports.congress.gov | IF11739 · VERSION 8 · UPDATED

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