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The Kentucky Association of Counties

IRS releases clarification on taxability of American Rescue Plan funds

By Kayla Carter, Research Associate
Last week the Internal Revenue Service (IRS) released a fact sheet on taxability and reporting of payments relating to the American Rescue Plan (ARP) Act Recovery Funds.

Some eligible uses of ARP Recovery Funds may have tax consequences for individuals.

Counties can use their ARP funds to provide premium pay to eligible workers performing essential work during the COVID-19 public health emergency. Treasury defines premium pay as an amount up to an additional $13 per hour, not to exceed $25,000 per eligible worker.

The IRS guidance clarifies that premium payments to county employees are considered taxable income and thus counties must withhold all federal taxes: income tax, Social Security tax and Medicare tax.

Since premium pay is considered income to the employee, counties must also meet all state and local withholding and match requirements, including routine pension contributions.

Treasury previously clarified in the Interim Final Rule that counties can use ARP funds to pay for the covered benefits associated with premium pay including the employer contribution for Social Security, Medicare, and pensions.

The IRS guidance also provides clarification on the taxability of payments for childcare assistance and utility assistance. Neither of these are taxable because they are intended to pay for expenses resulting from the COVID-19 pandemic which is considered a qualified disaster relief payment and is excluded from taxable income.

To view the IRS Fact Sheet, click here.


Kentucky Association of Counties
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