President Biden has just signed the American Rescue Plan – a $1.9 trillion pandemic relief package – into law.
“This historic legislation is about rebuilding the backbone of our country and giving the people of this nation – working people and middle-class folks who have built the country – a fighting chance,” Biden said as he signed the bill into law.
The Institute on Taxation and Economic Policy estimates that those who earn $65,000 or less will receive on average $3,450 from the Rescue Plan’s stimulus payments and various tax credit expansions.
Here’s how this landmark legislation will impact families and nannies.
Economic impact payments
The Rescue Plan includes $1,400 Economic Impact Payments for individuals making $75,000 or less. The payments phase out if you are making more than $80,000.
Married couples with a combined income of up to $150,000 will receive $2,800 with those payments phased out at an income level of $160,000.
Children – including full-time students younger than 24 – will be eligible for $1,400 payments.
The White House says some individuals and families may receive their new stimulus checks as direct deposits in their bank accounts as soon as this weekend.
To determine the status of your stimulus payment, use the Get My Payment tool from the IRS. You will need to provide some basic information, including:
- Social Security Number
- Date of birth
- Street address
- Zip code
Household employees may not receive a stimulus check if they are paid “off the books.”
Dependent Care FSAs
The expense limit for Dependent Care Flexible Spending Accounts (FSAs) – used by families to help defray the cost childcare – will increase from $5,000 ($2,500 married filing separately) to $10,500 ($5,250 married filing separately). Families can fund FSAs – offered through their employers – with pre-tax dollars to reduce their taxable income. Money placed in an FSA is not subject to Social Security, Medicare, federal income, or state income taxes. Families are then reimbursed tax-free for permissible childcare expenses like wages paid to a nanny.
If you have at least $10,500 in childcare expenses in 2021 and fund your FSA with the maximum allowed, it is estimated you will save between $3,300 and $4,700 depending on your tax bracket.
This provision is voluntary and businesses may retroactively amend their plans through the end of the year to permit the increased limit. Check with your human resources department to see if your employer will provide this increase to FSAs.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit for a family with one child will increase from $3,000 to $8,000. For families with two or more children, the credit increases from $6,000 to $16,000. This is the first time the Child and Dependent Care Tax Credit has increased since 2003.
The amount of credit gradually decreases based on the family’s household income, but most families should see some increased tax savings when applying the Child and Dependent Care Tax Credit.
Households with income of less than $125,000
Tax credit of 50 percent of qualifying expenses
- $4,000 for one child
- $8,000 for two or more children
Households with income between $125,000 – $185,000
Tax credit of 21-50 percent (tax credit drops one percentage point for every additional $2,000 in income)
- $1,680 – $4,000 for one child
- $3,360 – $8,000 for two or more children
Households with income between $185,001 – $400,000
Tax credit of 20 percent
- $1,600 for one child
- $3,200 for two or more children
Households with income between $400,001 – $440,000
Tax credit of one to 20 percent (tax credit drops one percentage point for every additional $2,000 in income)
- $80 – $1,600 for one child
- $160 – $3,200 for two or more children
Households with income of more than $440,000
The tax credit is phased out for households in this income bracket.
The increase in the Child and Dependent Care Tax Credit will be reflected when you file your tax return in 2022.
Child Tax Credit
The child tax credit gets a boost from $2,000 for eligible children (up to 16 years old) in 2020. This year only, the child tax credit will be:
- $3,600 for each child up to age five
- $3,000 for each child aged six to 17
The full benefit is available if:
- Your income is $75,000 or less and you’re filing as single or head of household
- Your income is $150,000 or less and you’re filing as married filing joint
The regular credit of $2,000 per child can still be taken as long as your adjusted gross income is below $200,000 for single filers or $400,000 for joint filers.
You may not need to wait until you file your tax return to see the full benefit. In July, the IRS is expected to start issuing half of that expected amount in periodic payments to families. You would receive the rest when you file your taxes in 2022.
Pandemic paid sick and family leave
The American Rescue Plan extends voluntary pandemic-related paid sick and family leave through September 30, 2021. Voluntary paid leave was previously set to expire on March 31, 2021. Families can provide paid leave to their employees for qualifying reasons related to the pandemic including time needed to get the vaccine. The dollar-for-dollar tax credit for paid leave also remains in effect.
Additional qualified reasons for paid sick and/or family leave include:
- waiting for the results of COVID-19 testing or a medical diagnosis of COVID-19, if either the employee has been exposed to COVID-19 or the employee’s employer has requested the test or diagnosis
- obtaining COVID-19 immunization or recovering from any injury, disability, illness, or condition related to a COVID-19 immunization
With one exception, calculating the amount of paid sick and family leave available to an employee and employer tax credits are the same as the Families First Coronavirus Act (FFCRA). The ARP removed the 10-day unpaid period for family leave that was part of the FFCRA. An employer may now provide paid family leave immediately and claim the credit. This also increases the maximum amount of paid family leave from $10,000 to $12,000. An employer may now claim the credit for up to 60 days of paid family leave. The FFCRA capped that amount at 50 days.
If your employee previously took their allotted 10 days of paid sick leave under the FFCRA, you can provide an additional 10 days of leave.
While federal paid sick leave can be offered voluntarily, states and cities may have their own sick leave laws that could be mandatory for household employees.
If an employee is paid illegally, they are not eligible for paid leave and their employers can’t receive tax credits.
GTM Payroll Services can handle employee paid leave and employer tax credits under the ARP for our clients. Contact our client support team (800) 929-9213 or email [email protected] if you have any questions.
Expanded unemployment benefits – which first started with the CARES Act at the onset of the pandemic – have been extended through September 6, 2021. The supplement provides $300 in weekly unemployment compensation on top of the amount provided by the state.
The Rescue Plan also provides up to 53 weeks of additional unemployment insurance to those who have exhausted benefits available through their state.
In addition, the first $10,200 in unemployment benefits are exempted from taxes for households earning up to $150,000. Typically, if you claim unemployment insurance you receive Form 1099-G and owe income taxes on benefits. If you have already filed your tax return this year, you may need to file an amended return to take advantage of the unemployment insurance tax break.
A proposal to gradually raise the federal minimum wage from the current rate of $7.25/hour to $15/hour in 2025 was not part of the final Rescue Plan that was signed into law.
Household employment guidance available
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