IRS Announces Tax Credits for Small Businesses Providing Paid Leave for COVID Vaccine

This is an update to Holland & Knight's previous blog, "Employers May Encourage Employees to Receive COVID-19 Vaccine, But Requiring it Raises Issues," April 26, 2021.

The Internal Revenue Service (IRS) recently announced that tax credits under the American Rescue Plan Act of 2021 (ARP) will be available to small businesses that provide paid leave to employees to receive or recover from the COVID-19 vaccine. This marks an extension of the ARP, which has until now allowed eligible businesses to claim tax credits to cover the cost of providing paid sick and family leave to employees during the COVID-19 pandemic.

The program covers paid leave taken by employees receiving or recovering from the COVID-19 vaccine, from April 1, 2021, to Sept. 30, 2021. Employers eligible to receive these tax credits include businesses and tax-exempt organizations with fewer than 500 employees, as well as certain governmental employers. Up to two weeks of an employee's paid sick leave can be covered, with a limit of $511 per day and $5,110 in the aggregate, "at 100 percent of the employee's regular rate of pay."

The program will allow eligible employers to use the tax credits they receive against their share of the Medicare tax. However, businesses will only be entitled to payment of the full amount of their credits if the amount exceeds that business' share of the Medicare tax. In anticipation of claiming these credits on their quarterly tax return, the IRS will allow eligible employers to retain certain federal employment taxes that they would otherwise be required to deposit, such as employee federal income withholdings and employees' social security and Medicare taxes.

For more information about the pandemic-related tax credits, contact the authors.