IRS Issues 2021 Reporting Guidance for Covid-Related Qualified Leave Wages

(Parker Tax Publishing September 2021)

The IRS issued guidance to employers on the reporting requirement for the following qualified sick leave wages and qualified family leave wages (qualified leave wages) paid to employees for leave provided in 2021: (1) qualified leave wages under the Families First Coronavirus Response Act (Families First Act), as amended by the COVID-related Tax Relief Act of 2020, paid for leave provided to employees beginning January 1, 2021, through March 31, 2021, and (2) qualified leave wages under Code Sec. 3131 and Code Sec. 3132, added by the American Rescue Plan Act of 2021 (ARP), paid for leave provided to employees beginning April 1, 2021, through September 30, 2021. The guidance also provides reporting information for self-employed individuals claiming qualified sick leave equivalent or qualified family leave equivalent credits for the 2021 tax year under the Families First Act or the ARP. Notice 2021-53.

Background

The Families First Coronavirus Response Act (Families First Act), which was signed into law (Pub. L. 116-127) in March of 2021 and which was amended by the COVID-related Tax Relief Act of 2020 (Tax Relief Act) (Pub. L. 116-260), enacted the following refundable tax credits: (1) a payroll tax credit for required paid sick leave; (2) a credit for sick leave for certain self-employed individuals (qualified sick leave equivalent); (3) a payroll tax credit for required paid family leave; and (4) a credit for family leave for certain self-employed individuals (qualified family leave equivalent). The American Rescue Plan Act (ARP), which was signed into law in March of 2021 (Pub. L. 117-2), enacted Code Secs. 3131, 3132, 3133, which extended the refundable tax credits for paid sick time (Code Sec. 3131) and paid family leave (Code Sec. 3132) for both employers and self-employed individuals through September 30, 2021, and provided a special rule relating to tax on employers claiming those credits (Code Sec. 3133).

The Families First Act also enacted the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA), which generally required eligible employers to provide paid sick leave and expanded family and medical leave, respectively, beginning April 1, 2020, through December 31, 2020, up to specified limits, to employees unable to work or telework due to certain circumstances related to COVID-19. The EPSLA entitled workers to up to 80 hours of paid sick time and the EFMLEA entitled workers to up to 10 weeks of paid family and medical leave if they were unable to work for certain reasons related to COVID-19. The Families First Act also provided eligible employers with fully refundable tax credits to cover the cost of the leave required to be paid under the EPSLA and EFMLEA. The requirement under the Families First Act that eligible employers provide leave under the EPSLA and EMFLEA does not apply after December 31, 2020. However, the Tax Relief Act extended the availability of the tax credits under the Families First Act through March 31, 2021, for paid leave that would have satisfied the EPSLA or EFMLEA requirements.

Reporting Requirements under Notice 2021-53

Last week, the IRS issued Notice 2021-53, which provides guidance for reporting qualified sick leave wages and qualified family leave wages (qualified leave wages) paid to employees for leave provided in 2021, as well as guidance for the reporting by self-employed individuals of qualified sick leave equivalents and qualified family leave equivalents taken for 2021.

Observation: Separate reporting requirements apply for calendar year 2020. Notice 2020-54 provides guidance on the 2020 reporting requirements.

Notice 2021-53 requires employers to report qualified leave wages either in Box 14 on a 2021 Form W-2, Wage and Tax Statement, or on a separate statement. Employers must report to the employee the types and amounts of the wages that were paid (e.g., qualified sick leave wages paid for reasons described in Sec. 5102(a)(1) of the EPSLA, etc.), with each amount separately reported either in Box 14 of Form W-2 or on a separate statement. This reporting will provide employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits for 2021. In Notice 2021-53, the IRS specifies certain language that must be used in labeling amounts that were paid to employees (e.g., "sick leave wages subject to the $200 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021").

If a separate statement is provided and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 sent to the employee, and if the employee receives an electronic Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

To the extent that qualified leave wages are social security wages or Medicare wages, they must also be included in Box 3 (up to the social security wage base) and Box 5, respectively. To the extent qualified leave wages are compensation subject to the Railroad Retirement Tax Act (RRTA), they must also be included in Box 14 under the appropriate RRTA reporting label(s).

Only eligible employers who claim credits under the Families First Act or Code Sec. 3131 and Code Sec. 3132 are required to separately report qualified sick leave wages and qualified family leave wages to their employees. Eligible employers who forego claiming refundable tax credits under the Families First Act or Code Sec. 3131 and Code Sec. 3132 are not required to separately report qualified sick leave wages or qualified family leave wages paid to employees to the extent those wages are not claimed as a credit. There are separate reporting requirements for (1) leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, under the Families First Act; and (2) leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, under Code Sec. 3131 and Code Sec. 3132.

With respect to leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, eligible employers claiming a credit under the Families First Act must separately state the total amount of qualified sick leave wages paid under the provisions of (1) the EPSLA, Sec. 5102(a)(1), (2), or (3); (2) qualified sick leave wages paid under EPSLA, Sec. 5102(a)(4), (5), or (6); and (3) qualified family leave wages paid under the provisions of EFMLEA, Sec. 3102(b).

With respect to leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, eligible employers claiming a credit under Code Sec. 3131 or Code Sec. 3132 must separately state (1) the total amount of qualified sick leave wages paid under the provisions of EPSLA, Sec. 5102(a)(1), (2), or (3); (2) qualified sick leave wages paid under EPSLA, Sec. 5102(a)(4), (5), or (6); and (3) qualified family leave wages paid under the EFMLEA.

Reporting for Self-employed Individuals Claiming Refundable Tax Credits

A self-employed individual carrying on a trade or business in 2021 who would have received qualified leave wages if the individual were treated as an employee of an employer (other than himself or herself) may claim refundable tax credits if the individual is unable to work or telework (eligible self-employed individual) for reasons relating to the covid pandemic. Specifically, under the Families First Act, an eligible self-employed individual can claim refundable tax credits for qualified sick leave equivalent amounts and qualified family leave equivalent amounts (qualified leave equivalent amounts) if the individual is unable to work or telework during the period beginning April 1, 2020, through March 31, 2021, due to certain circumstances related to COVID-19. Under the ARP, an eligible self-employed individual can claim refundable tax credits for qualified leave equivalent amounts if the individual is unable to work or telework during the period beginning April 1, 2021, through September 30, 2021, due to certain circumstances related to COVID-19. An eligible self-employed individual may have to reduce qualified leave equivalent amounts by some or all of the qualified leave wages the individual received from an employer.

If a self-employed individual is entitled to a refundable tax credit for a qualified sick leave equivalent amount under the Families First Act and also receives qualified sick leave wages as an employee, the qualified sick leave equivalent amount for which the eligible self-employed individual may claim a credit is reduced to the extent that the sum of the qualified sick leave equivalent amount and any qualified sick leave wages exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described in EPSLA, Section 5102(a)(1), (2), or (3)). Similarly, if a self-employed individual is entitled to a refundable tax credit for a qualified family leave equivalent amount under the Families First Act and also receives qualified family leave wages as an employee, the qualified family leave equivalent amount for which the self-employed individual may claim a credit is reduced to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages exceeds $10,000.

Self-employed individuals claiming a credit for a qualified sick leave equivalent amount or qualified family leave equivalent amount must report the qualified sick leave wages and qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, and include the form with their 2021 income tax returns. Such individuals may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent amounts by these qualified leave wages.

Practice Tip: Under the Families First Act, the requirement to reduce qualified leave equivalent amounts is not applied separately for 2020 and 2021. Instead, the reduction to the qualified leave equivalent amounts in each case is calculated using the sum of the qualified leave equivalent amounts and the qualified leave wages for the entire period beginning April 1, 2020, through March 31, 2021. As a result, if an eligible self-employed individual reduced a qualified sick leave equivalent amount for 2020 because the sum of the qualified sick leave equivalent amount and the qualified sick leave wages exceeded $5,110, then no credit under the Families First Act is available for 2021. Likewise, if an eligible self-employed individual reduced a qualified family leave equivalent amount for 2020 because the sum of the qualified family leave equivalent amount and the qualified family leave wages exceeded $10,000, then no family leave credit is available for 2021.

With respect to leave provided under Code Sec. 3131 and Code Sec. 3132 beginning April 1, 2021, through September 30, 2021, qualified sick leave wages are wages and compensation paid with respect to leave that satisfies the applicable covid-related requirements in the EPSLA. In general, eligible employers can claim refundable tax credits if they provide employees with up to 80 hours of paid sick leave due to the employee being unable to work or telework due to covid-related reasons that satisfy the EPSLA requirements.

If a self-employed individual is entitled to a refundable tax credit for a qualified sick leave equivalent amount with respect to qualified leave wages paid beginning April 1, 2021, through September 30, 2021, and also receives qualified sick leave wages as an employee, the qualified sick leave equivalent amount for which the eligible self-employed individual may claim a credit is reduced to the extent that the sum of the qualified sick leave equivalent amount and any qualified sick leave wages exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described in EPSLA, Section 5102(a)(1), (2), or (3)). Similarly, if a self-employed individual is entitled to a refundable tax credit for a qualified family leave equivalent amount and also receives qualified family leave wages that meet the requirements of the EFMLEA, the qualified family leave equivalent amount for which the self-employed individual may claim a credit is reduced to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages exceeds $12,000.

For a discussion of coronavirus-related business tax credits, see Parker Tax ¶106,400.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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