Qualified COVID-19 paid leave benefits: Reporting on Form W-2

Editor: Susan Minasian Grais, CPA, J.D.,LL.M.

In Notice 2021-53, the IRS explained how employers must report to their employees qualified sick leave or family leave wages paid in 2021. Under the guidance, employers are required to report these wages either in box 14, “Other,” of Form W-2, Wage and Tax Statement, or in a separate statement.

The IRS imposed this additional Form W-2 reporting requirement so that employees who also have self-employment income can properly claim their qualified sick or family leave equivalent credits. Self-employed individuals can claim credits for equivalent amounts if they would have received qualified leave wages had they been treated as an employee of an employer, but they may have to reduce their qualified leave equivalent amount by some or all of any qualified leave wages they received from an employer. In other words, qualified leave wages received from an employer may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income.

Only employers that claim tax credits under these provisions are required to separately report qualified sick leave wages and qualified family leave wages to their employees. Similarly, governmental employers that are prohibited from claiming credits for qualified leave wages are not required to separately report any qualified sick leave or family leave wages paid to their employees.

Background

The Families First Coronavirus Response Act (FFCRA), P.L. 116-127, as amended, generally required covered employers to provide their employees with emergency paid sick leave and expanded family and medical leave for specified reasons related to COVID-19 beginning April 1, 2020, through Dec. 31, 2020. At the same time, the act provided eligible employers with fully refundable tax credits to cover the cost of these benefits (see U.S. Department of Labor fact sheet, available at www.dol.gov; and IRS FAQs, available at www.irs.gov).

Although the federal requirement to provide leave benefits under the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA) did not apply after Dec. 31, 2020, subsequent coronavirus-related legislation extended the tax credits, first through March 31, 2021, and later through Sept. 30, 2021, for paid leave that would have satisfied the EPSLA and EFMLEA requirements.

Reporting instructions for boxes 1, 3, and 5

According to Notice 2021-53, FFCRA qualified leave wages must be reported in box 1, “Wages, Tips, Other Compensation,” of Form W-2. To the extent that qualified leave wages are Social Security wages or Medicare covered wages, they must also be included in box 3, “Social Security Wages,” (up to the Social Security wage base) and box 5, “Medicare Wages and Tips,” 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).

Reporting instructions for box 14 or separate statement

In addition to the regular reporting requirements described above, affected employers must report the following information to employees in box 14 of Form W-2 or in a separate statement:

• The total amount of qualified sick leave wages paid for reasons described in paragraph (1), (2), or (3) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on Jan. 1, 2021, through March 31, 2021. In labeling this amount, employers must use the following, or similar language: “sick leave wages subject to the $511 per day limit paid for leave taken after Dec. 31, 2020, and before April 1, 2021.”
• The total amount of qualified sick leave wages paid for reasons described in paragraph (4), (5), or (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on Jan. 1, 2021, through March 31, 2021. In labeling this amount, employers must use the following, or similar, language: “sick leave wages subject to the $200 per day limit paid for leave taken after Dec. 31, 2020, and before April 1, 2021.”
• The total amount of qualified family leave wages paid to the employee under the EFMLEA with respect to leave provided to employees during the period beginning on Jan. 1, 2021, through March 31, 2021. In labeling this amount, employers must use the following or similar language: “emergency family leave wages paid for leave taken after Dec. 31, 2020, and before April 1, 2021.”
• The total amount of qualified sick leave wages paid for reasons described in paragraph (1), (2), or (3) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through Sept. 30, 2021. In labeling this amount, employers must use the following, or similar, language: “sick leave wages subject to the $511 per day limit paid for leave taken after March 31, 2021, and before Oct. 1, 2021.”
• The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), and (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through Sept. 30, 2021. In labeling this amount, employers must use the following, or similar, language: “sick leave wages subject to the $200 per day limit paid for leave taken after March 31, 2021, and before Oct. 1, 2021.”
• The total amount of qualified family leave wages paid to the employee under the EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through Sept. 30, 2021. In labeling this amount, employers must use the following, or similar, language: “emergency family leave wages paid for leave taken after March 31, 2021, and before Oct. 1, 2021.”

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

Model language for optional employee instructions

Because employees may not understand why this information is being provided to them, employers can include an explanation in the instructions for employees on Form W-2 or in a separate statement sent to the employee. Notice 2021-53 suggests that employers consider using the following model language (modified as necessary) to explain the purpose of including this information:

Included in box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act and/or Secs. 3131 and 3132 of the Internal Revenue Code. Specifically, up to six types of paid qualified sick leave wages or qualified family leave wages may be reported in box 14:

• Sick leave wages subject to the $511 per day limit paid for leave taken after Dec. 31, 2020, and before April 1, 2021, because of care you required.
• Sick leave wages subject to the $200 per day limit paid for leave taken after Dec. 31, 2020, and before April 1, 2021, because of care you provided to another.
• Emergency family leave wages paid for leave taken after Dec. 31, 2020, and before April 1, 2021.
• Sick leave wages subject to the $511 per day limit paid for leave taken after March 31, 2021, and before Oct. 1, 2021, because of care you required.
• Sick leave wages subject to the $200 per day limit paid for leave taken after March 31, 2021, and before Oct. 1, 2021, because of care you provided to another.
• Emergency family leave wages paid for leave taken after March 31, 2021, and before Oct. 1, 2021.

If you have self-employment income in addition to wages paid by your employer and you intend to claim any qualified sick leave or qualified family leave equivalent credits, you must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with your income tax return, and may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages. If you have self-employment income, you should refer to the instructions for your individual income tax return for more information.

Corrective procedure for mistakes in reporting

If an employer that does not claim FFCRA tax credits, or is prohibited from claiming those credits, erroneously reports sick leave wages or family leave wages to an employee on Form W-2, box 14, or in a separate statement, the employer must either furnish a W-2c, Corrected Wage and Tax Statement, or provide a corrected statement to the employee correcting the erroneous reporting.

The Form W-2c or corrected statement should be sent only to the employee and should not be filed with the Social Security Administration if the sole correction is related to the reporting of leave wages in box 14.

Form 1040 reporting instructions for self-employed individuals 

As noted above, self-employed individuals claiming a tax credit for a qualified sick leave equivalent amount or qualified family leave equivalent amount must report these qualified sick leave wages and qualified family leave wages on Form 7202, which they should include with their 2021 federal income tax return. These taxpayers may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent amounts by these qualified leave wages.

EditorNotes

Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C. For additional information about these items, contact Ms. Grais at 202-327-8788 or susan.grais@ey.com.

Contributors are members of or associated with Ernst & Young LLP.