Last year, the Families First Coronavirus Response Act (FFCRA) was enacted, which required certain public and private sector employers to provide emergency paid sick leave (EPSL) and emergency family medical leave (EFML) to employees affected by COVID-19. While the law provided a tax credit to aid covered private-sector employers in paying for the leave, the tax credit was not available to governmental employers. As a result of changes made in the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA), the mandatory FFCRA leave provisions have now expired. However, the same legislation extended the tax credit for private sector employers who voluntarily continue to provide paid leave under the FFCRA through September 30, 2021.
In addition to the above changes, ARPA included language suggesting that eligibility for the tax credit may have been expanded to include state and local governmental employers. Recently, the IRS clarified that certain governmental employers are now eligible for FFCRA credits and issued guidance relating to the mechanics of claiming the credit.
In its new guidance, the IRS affirmatively states that employers eligible for the tax credit include any business, including state and local governmental employers. In addition, the 500-employee limit does not appear to apply to those 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, state and local 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, 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. Certain employers may also be able to request an advance of the credit under appropriate circumstances.
Please contact us or connect with your P&N tax advisor to discuss how this guidance may impact your organization.