Businesses looking to claim credits on wages paid to employees on leave now have more information about how the program will work after Congress tweaked the law before the end of 2020.
The IRS updated its FAQ on the tax credits to cover the costs of providing employees with paid sick and expanded family and medical leave because of the coronavirus, said Sydney Gernstein, branch chief (employment tax 1), IRS Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes).
Speaking January 28 at an American Bar Association Section of Taxation virtual meeting, Gernstein said the FAQ reflects changes made in the Consolidated Appropriations Act, 2021 (P.L. 116-260), enacted in December 2020.
In March 2020 Congress passed the Families First Coronavirus Response Act (FFCRA; P.L. 116-127), which expanded some provisions to require employers to provide paid leave to employees for qualifying events. The tax credit in the FFCRA piggybacked on those provisions and gave employers that provided that paid leave fully refundable credits, basically dollar for dollar, Gernstein said. Originally that program was scheduled to expire December 31, 2020, at which time the mandates to provide the paid leave and the credits would have ended.
Under the December 2020 coronavirus legislation, the time to claim the tax credit was extended to March 31. However, the new law doesn’t require employers to provide the paid leave in 2021; those provisions from the FFCRA were allowed to sunset on December 31, 2020.
Businesses now have the option to provide paid leave to employees in some circumstances from January 1 to March 31, and they can claim tax credits on those wages. But they aren’t required to provide paid leave for that period under the law, Gernstein pointed out.
The December 2020 legislation also made some taxpayer-friendly clarifications regarding self-employed individuals, Gernstein said.
“Now, self-employed individuals may elect to use their prior-year net earnings from self-employment taxes when determining their average daily self-employment, from which their credits are determined,” Gernstein said, adding that the basic idea with the self-employed tax credits is that the amount of the credit that the person can claim is tied to specific limits.
Other changes in the later legislation include clarifications to the definition of qualified sick leave wages and qualified family leave wages, which are the wages for which employers can claim the credits under the FFCRA, Gernstein said.
The updated FAQ contains several clarifications that reflect changes made under the December 2020 legislation, and the date when the questions were updated is listed next to each one to help taxpayers know which provisions have been changed.