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COVID-19 Federal Assistance e311

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Federal Funding Streams, Tax Credits

Do COVID-19-related tax credits for paid leave align or correlate with Stafford Act/FEMA funding or the American Rescue Plan Act?

The American Rescue Plan Act of 2021 (“ARP”) extends several tax benefits to small businesses that are intended to help businesses stay open, recover, make payroll, and take steps to protect health outcomes for employees. 

ARP extends the availability of the Employee Retention Credit for small businesses through December 2021 and allows businesses to offset their current payroll tax liabilities by up to $7,000 per employee per quarter. This credit of up to $28,000 per employee for 2021 is available to small businesses who have seen their revenues decline or who have been temporarily shuttered due to COVID-19.[1]

The American Rescue Plan Act also extends the availability of Paid Leave Credits for small and midsize businesses that offer paid leave to employees who may take leave due to illness, quarantine, or caregiving.[2] This is extended through September 2021.[3] Businesses can take dollar-for-dollar tax credits equal to wages of up to $5,000 if they offer paid leave to employees who are sick or quarantining.[4] Paid Leave Credits are a powerful incentive to encourage the offer of paid sick and family leave to ensure sick employees are able to stay home.

The Emergency Paid Leave and Paid Leave Tax Credit extends the Families First Coronavirus Response Act (“FFCRA”) emergency paid leave program through September 30, 2021 and provides up to 12 weeks of paid sick and family medical leave related to the COVID-19 pandemic.[5] Notably, generally public sector employers, including counties, are now eligible to receive the FFCRA tax credit for wages or compensation paid to an employee who is unable to work due to the pandemic.[6] Under previous law, counties were not eligible to receive this credit, impacting already-strained county budgets.

Additionally, as previously authorized under the FFCRA, generally a local government employer that provides paid leave wages under the Emergency Paid Sick Leave Act (“EPSLA”) or Expanded Family Medical Leave Act (“EFMLA”) will not be required to pay the employer's share of social security tax on the paid leave wages. Counties employ 3.6 million individuals, and without this tax credit, the high costs of funding the enhanced paid leave benefits could harm counties’ ability to provide critical services that are necessary for a successful pandemic response.[7]

Under the EPSLA, eligible employers provide employees with paid sick leave if the employee is unable to work (including telework) due to any of the following:[8]

  • The employee is under a Federal, State, or local quarantine or isolation order related to COVID-19;
  • The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  • The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  • The employee is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  • The employee is caring for the child of such employee if the school or place of care of the child has been closed, or the childcare provider of such child is unavailable, due to COVID–19 precautions; and
  • The employee is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services.[9]

In addition, Section 3131 of the ARP has expanded the criteria for EPSLA to include the following:

  • A covered employee is absent from work because the employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19, provided that the employee has been exposed to COVID-19 or the employer has requested that the employee obtain such test or diagnosis;
  • An employee is obtaining immunization related to COVID-19; and
  • An employee is recovering from any injury, disability, illness, or condition related to an immunization for COVID-19.

Last Revised: April 14, 2021

[1] U.S. Department of the Treasury, FACT SHEET: The American Rescue Plan Will Delivery Immediate Economic Relief to Families, https://home.treasury.gov/news/featured-stories/fact-sheet-the-american-rescue-plan-will-deliver-immediate-economic-relief-to-families (Last accessed on April 6, 2021)

[2] Internal Revenue Service, COVID-19 Related Tax Credits for Paid leave Provided by Small and Midsize Businesses FAQs, https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-paid-leave-provided-by-small-and-midsize-businesses-faqs (Last accessed on April 6, 2021)

[3] Internal Revenue Service, COVID-19 Related Tax Credits for Paid leave Provided by Small and Midsize Businesses FAQs, https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-paid-leave-provided-by-small-and-midsize-businesses-faqs (Last accessed on April 6, 2021)

[4] U.S. Department of the Treasury, FACT SHEET: The American Rescue Plan Will Delivery Immediate Economic Relief to Families, https://home.treasury.gov/news/featured-stories/fact-sheet-the-american-rescue-plan-will-deliver-immediate-economic-relief-to-families (Last accessed on April 6, 2021)

[5] The National Association of Counties, Legislative Analysis for Counties: American Rescue Plan Act of 2021, https://www.naco.org/resources/naco-analysis-american-rescue-plan-act (last accessed April 6, 2021)

[6] The National Association of Counties, Legislative Analysis for Counties: American Rescue Plan Act of 2021, https://www.naco.org/resources/naco-analysis-american-rescue-plan-act (last accessed April 6, 2021)

[7] The National Association of Counties, Legislative Analysis for Counties: American Rescue Plan Act of 2021, https://www.naco.org/resources/naco-analysis-american-rescue-plan-act (last accessed April 6, 2021)

[8] Internal Revenue Service, COVID-19 Related Tax Credits for Paid leave Provided by Small and Midsize Businesses FAQs, https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-paid-leave-provided-by-small-and-midsize-businesses-faqs (Last accessed on April 6, 2021)

[9] Internal Revenue Service, COVID-19 Related Tax Credits for Paid leave Provided by Small and Midsize Businesses FAQs, https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-paid-leave-provided-by-small-and-midsize-businesses-faqs (Last accessed on April 6, 2021)