American Rescue Plan Act (ARPA) Extends 3 COVID-19 Payroll Tax Credits
Three Coronavirus-related employment tax credits will be available for six additional months under the American Rescue Plan Act of 2021 (ARPA), which Congress passed March 10 and was signed by President Biden on March 11.
The act updated the amount and availability of the child tax credit, likely necessitating changes to Form W-4, Employee’s Withholding Certificate. Additionally, the act increased the amounts pertaining to dependent care assistance provided by an employer that an employee may exclude from their income.
Below are the payroll impacts:
Extension of Credits for Qualified Leave Wages
Under Section 9641 of the ARPA, the bill extended the period in which eligible employers may claim the credit for paying qualified sick leave wages and the credit for paying qualified family leave wages.
The credits, enacted by the 2021 Consolidated Appropriations Act in December 2020, were originally made available for qualified leave wages paid in connection with leave periods that occurred by March 31, 2021. They are now also available for qualified leave wages paid in connection with leave periods that occur from April 1 to Sept. 30, 2021.
- The ARPA provides a full reset pertaining to qualified sick leave wages. Starting April 1, 2021, there is a new set of 10 days for which creditable qualified sick leave wages may be paid.
- A full reset was also provided by the ARPA regarding the number of days for which qualified family leave wages may be provided that are eligible to be counted toward the credit for such wages. The act expanded the total amount of qualified family leave wages that can be counted—effective April 1, 2021. Starting April 1, 2021, the total amount of qualified family wages that may be counted toward the credit for qualified family leave wages is $12,000 per employee, up from $10,000 per employee.
One of the six eligibility conditions for which an employee may be paid qualified sick leave wages was
expanded by the ARPA. The third eligibility condition, originally established by the FFCRA, said that employees who are experiencing symptoms of COVID-19 and are seeking a medical diagnosis are qualified for sick leave wages. The ARPA expanded this condition to also include situations when an employee takes leave because the employee is awaiting the results of a diagnostic test for COVID-19 after being exposed to the Coronavirus or because the employer requested the test, and situations when an employee takes leave to obtain COVID-19 immunization or to recover from any health condition related to the immunization. These conditions are effective for qualified sick leave wages paid in connection with leave periods taken in the second and third quarters of 2021.
Employee Retention Credit (ERC) Extended
Section 9651 of the ARPA extended the employee retention credit through December 31, 2021 so that it can be claimed based on qualified wages that employers pay to employees in the third and fourth quarters of 2021. Under the 2021 Consolidated Appropriations Act, the credit would no longer have been available for amounts paid after the second quarter of 2021. While the term “qualified wages” is similar to the term “qualified leave wages”, “qualified wages” in the context of the employee retention credit is a different concept.
Under the ARPA, the threshold for an employer to be considered a large employer with regard to the definition of “qualified wages” remains at 500 employees, where it was set in the 2021 Consolidated Appropriations Act. For large employers, only qualified wages paid to employees while they are not working are considered “qualified wages.” Other employers may consider “qualified wages” as all wages paid while the employer qualifies for the credit.
The bill also preserves changes originally made by the 2021 Consolidated Appropriations Act for the first two quarters of 2021, including that the amount of the credit is 70 percent of an employee’s qualified wages for each quarter, up to a per-quarter limit of $10,000 of qualified wages paid to an employee. The maximum employee retention credit for each employee is to remain $14,000 ($7,000 per quarter) for the quarters covered by the ARPA, which is 70 percent of the $20,000 combined qualified wage limit for the third and fourth quarters of 2021 for an additional $14,000 ($7,000 per quarter). The maximum allowable credit for ERC is $28,000 Q1-Q4 for 2021.
Child Tax Credit Changes – Impacts Form W-4
The ARPA increased the child tax credit for 2021 and broadened the scope of which dependents may count as qualifying children for the purpose of the credit.
Section 9611 of the ARPA raised the child tax credit to up to $3,000 per qualifying child for 2021, whereas without the ARPA, the child tax credit for 2021 would have been up to $2,000 per qualifying child. For the purpose of being considered a “qualifying child” for this credit, a dependent typically needs to be younger than 17, but for 2021, as per the ARPA, a dependent would need to be younger than 18 to be considered a qualifying child.
These changes likely necessitate updates to Step 3 in the 2021 version of Form W-4, Employee’s Withholding Certificate. The IRS will need to issue guidance and an updated Form W-4.
Increase in Dependent-Care Assistance
The ARPA also increased the amount of dependent-care assistance provided by an employer that employees may exclude from their income.
Section 9632 of the act raised the maximum annual exclusion for dependent-care assistance provided by an employer to $10,500 from $5,000 (individuals or married couples filing jointly), or to $5,250 from $2,500 (married couples filing separately). These increased amounts are to be in effect only for 2021.
It's important to note that some of these regulations mentioned above may be modified based on
additional clarification and FAQs from DOL, IRS and the Treasury Department in the coming weeks.
Namely does not provide legal, accounting, or tax advice. Please consult with professional counsel for any tax, accounting or legal questions.
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