The $1.9 trillion American Rescue Plan contained a number of measures designed to help businesses and workers, including the extension of tax credits to retain employees, provide paid leave, and ease the cost of child care.

A word of caution: we always recommend that you talk to your tax advisors to understand how the rules might apply to your situation.

Employee Retention Credit

The American Rescue Plan extends the availability of the Employee Retention Credit (ERC) 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 have been temporarily shuttered, because of COVID.

Paid Leave Credit

Paid Leave Credits were also extended by the American Rescue Plan through September 2021 for small and midsize businesses that offer paid leave to employees for illness, quarantine, or caregiving. 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.

The 2020 family leave rules required businesses to provide up to 10 additional weeks of leave for employees who are unable to work because they need to care for children whose school or normal child care is not available because of COVID.  Those employees are entitled to two-thirds of their regular wages, capped at $200/day up to a total of $10,000.

Businesses that paid employees under these programs during the period from April 1, 2020, through December 31, 2020, can take the tax credit against their payroll taxes. If the amount of the credit exceeds a business’s portion of its employment taxes, the excess is refunded directly back to the business.

If your business provided paid leave to employees in 2020 and you have not yet claimed the credit, you can file amended payroll tax forms to claim the credit and receive your tax refund.

Child and Dependent Care Tax Credit

The child and dependent care tax credit is a credit allowed for a percentage of work-related expenses that a taxpayer incurs for the care of qualifying persons to enable the taxpayer to work or look for work.  The American Rescue Plan Act of 2021 expands the credit by increasing the amount of work-related expenses taken into account, the percentage of allowed work-related expenses, and the income limitations. The maximum percentage allowed as a credit is 50 percent.

The act was also amended to make the credit refundable for a taxpayer (or in the case of a joint return, either spouse) who lives in one of the 50 states or the District of Columbia for more than half the year in 2021. This means that more taxpayers will be eligible for the credit and, for many taxpayers, the amount of the credit will be larger.

The maximum total amount of the credit is $4,000 if you have one qualifying person, and $8,000 f you have two or more qualifying persons.

A qualifying person is defined as:

  • A dependent who is under age 13 when the care is provided;
  • A spouse, if he or she isn’t mentally or physically able to care for himself or herself and lives with you for more than half the year; and
  • A person who isn’t mentally or physically able to care for himself or herself, lives with you for more than half the year, and either:
    • Is your dependent, or
    • Would have been your dependent except that he or she receives more than a certain gross income amount ($4,300 in 2021), he or she files a joint return, or you (or your spouse in the case of a joint return) can be claimed as a dependent on someone else’s return.

For more information for all of these programs, visit IRS.gov.