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IRS Issues New FAQs About Federal Paid Leave Employer Tax Credits

The Internal Revenue Service recently updated their FAQs about the federal paid leave tax credits to help small and mid-sized employers finance employees' salaries and health benefit costs.

The Consolidated Appropriations Act of 2021, enacted on December 27, 2020, allows eligible employers the option of extending the availability of a paid sick and family leave program through March 31, 2021. They can claim the related tax credits through that period as well. If an eligible business did not extend the paid leave program, its requirements expired on December 31, 2020.

Eligibility for the paid leave program applies to almost all businesses with less than 500 employees. The employers that elect to continue the program are entitled to immediately receive a credit in the full amount of the paid sick leave and family leave plus related health plan expenses and the employer's share of Medicare tax on the leave provided through March 31, 2021. The refundable credit applies against certain employment taxes on wages paid to all employees.

Eligible employers may claim the credits on their federal employment tax returns (e.g., Form 941, Employer's Quarterly Federal Tax Return), but they can benefit more quickly from the credits by reducing their federal employment tax deposits. Suppose there are insufficient federal employment taxes to cover the amount of the credits. In that case, an eligible employer may request an advance payment of the credits from the IRS by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19.