IRS Confirms – Government Employers Are Now Eligible for COVID-19 Leave Tax Credits
In new guidance, the IRS confirms that non-federal government employers may now be able to claim a tax credit to cover the cost of voluntarily providing paid sick and family leave to employees for COVID-19 related reasons. Formerly limited to private-sector employers with fewer than 500 employees, the credit is now available to many state and local governmental bodies such as public school districts, public colleges and universities, and municipalities. Tax credits are available to eligible employers that provide paid sick and family leave for qualifying COVID-19 related reasons from April 1, 2021 through September 30, 2021.
Last year, Congress enacted the Families First Coronavirus Response Act (“FFCRA”), which required private-sector employers with fewer than 500 employees and all state and local government employers to provide paid sick and family leave to employees affected by COVID-19. The law allowed covered private-sector employers to claim a tax credit covering the full cost of the leave. The tax credit was not available to government employers. The mandatory FFCRA leave provisions expired on December 31, 2020.
In a relief bill passed in late December 2020, Congress declined to extend mandatory leave under the FFCRA, but extended the tax credit for private sector employers who voluntarily continued to provide paid leave that would previously have been required under the FFCRA through March 31, 2021.
Last month, President Biden signed the $1.9 trillion COVID-19 relief bill dubbed the American Rescue Plan (“ARP”). As we previously reported, while the ARP did not reinstate mandatory paid leave under the FFCRA, it did extend tax credits for employers who voluntarily provide FFCRA leave to employees through September 30, 2021. While the new legislation included language suggesting that eligibility for the tax credit may have been expanded to include governmental employers, the IRS did not immediately confirm this or issue guidance as to how governmental employers can claim the credit.
New IRS Guidance and Other Details
In its new guidance, the IRS affirmatively states that employers eligible for the tax credit include “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.” Section 501(c)(1) of the Internal Revenue Code applies to certain corporations organized under an Act of Congress, such as certain federal credit unions. The 500-employee limit does not appear to apply to governmental employers, meaning that even larger municipalities, school districts, public colleges and universities, and other governmental employers may now be eligible for the tax credit. However, unlike smaller private sector employers, governmental employers do not appear to be eligible to claim the credit for paid leave taken prior to April 1, 2021.
According to the IRS guidance, eligible employers can claim the tax credit on their quarterly federal employment tax return, typically Form 941. Employers claiming the credit are permitted to keep federal employment taxes that they otherwise would have deposited, including amounts withheld from employees and the employer share of Social Security and Medicare taxes, up to the amount of the credit for which they are eligible, as explained in the instructions for Form 941. Employers can also request an advance refund for tax credits using Form 7200.
The credit is available to cover the cost of paid sick and family leave for reasons previously covered by the FFCRA, or for one or more of the following:
- The employee is obtaining a COVID-19 vaccination;
- The employee is recovering from any injury;
- The employee is seeking or awaiting the results of a diagnostic test or medical diagnosis for COVID-19, or the employer has requested such a test or diagnosis.
The ARP adds non-discrimination rules stating that no tax credit is available if the employer, in determining availability of the paid leave, discriminates in favor of highly compensated employees, full-time employees, or employees on the basis of tenure with the employer. The ARP also resets the 10-day limit for the tax credit for paid sick leave under the FFCRA beginning April 1, 2021, so that employers can claim the credit for leave provided to employees who previously exhausted their emergency sick leave under the FFCRA.
Government employers that wish to claim these tax credits should consult with their tax advisors to ensure that they qualify for the credits and are taking all necessary steps to do so.