Understanding the new employer credit for paid family and medical leave
By Brittany Sabalza
As part of the 2017 Tax Cuts and Jobs Act, the IRS released information regarding a new general business credit, the Employer Credit for Paid Family and Medical Leave.
Traditionally, employers haven’t received any special tax benefits for earnings paid to employees during a Family Medical Leave (FML), but this new credit is now available to employers who offer voluntary paid time off to qualifying employees who are FML wages paid in 2018 and 2019. Generally, employers who have more than 50 employees within a 75-mile range are subject to the Family and Medical Leave Act of 1993 (FMLA), luckily, the IRS has created this credit to provide relief to those employers subject to FMLA and includes employers who have less than 50 employees and offer “FMLA-like” leave.
In order to claim the credit, it is required that employers have a written policy in place that offers full-time employees at least two weeks of paid family and medical leave annually. This is prorated for part-time employees. Any paid leave wages must not be less than 50 percent of regular wages.
For purposes of the Employer Credit for Paid Family and Medical Leave, family and medical leave is considered up to 12 weeks of paid time off for one or more of the following reasons:
Birth of the employee’s child and to care for such child.
Placement of a child with the employee for adoption or foster care.
To care for the employee’s spouse, child, or parent who has a serious health condition.
The employee’s serious health condition that makes the employee unable to perform the functions of his or her position.
Any qualifying exigency due to an employee’s spouse, child or parent being on covered active duty (or has been notified of an impending call or order to covered active duty) in the Armed Forces.
To care for an Armed Forces service member who is the employee’s spouse, child, parent or next of kin.
Employers who offer voluntary paid time off for reasons other than those stated above cannot claim the credit. Any leave paid for by state and local governments or paid to an employee due to state and local requirements also are not considered when determining eligibility for the credit.
To claim FML wages paid in 2018, the employee to whom the employer paid FML wages must be employed by that same employer for one year or more and 2017 wages may not exceed $72,000 in order to be considered.
The Employer Credit for Paid Family and Medical Leave credit starts at 12.5 percent and is increased by a quarter of a percent for FML wages paid above 50 percent of an employee’s regular wages and can increase to a maximum of 25 percent.
Since a tax credit reduces the amount of tax liability dollar for dollar, this means the credit may reduce tax liability by 12.5-25 percent of qualifying FML wages paid during the tax year.
Your company pays $10,000 of FML wages to Joe (a qualifying employee) while he’s on family and medical leave. This amount is 50 percent of Joe’s regular wage and you the Employer, can claim a paid family and medical leave credit of 12.5 percent of $10,000, or $1,250.
Now let’s say Joe was paid $12,000 at 60 percent of regular wages (10 percent higher than 50 percent) the employer’s credit is increased by 10 × 0.25 percent, or 2.5 percent. The employer can claim a paid family and medical leave credit of 15 percent (12.5 percent plus 2.5 percent) of $12,000, or $1,800.
Be prepared to take advantage of the credit. Employers should begin to review leave policies or even take a look at creating a qualifying family medical leave plan if it’s beneficial. Seek help from an HR professional if necessary. For assistance determining your eligibility for the credit and how the credit could be advantageous to you, contact an experienced tax professional. Do your research before hiring a tax professional. Be sure that the professional is reputable, experienced and specializes in business taxes and understands how the credit may affect you. Although, the IRS has released some information regarding the credit, more detailed explanations and interpretations regarding the regulations can be expected to be released. I
For More Information on the new Employer Credit for Paid Family and Medical Leave visit IRS.gov
For more information on other general business credits visit IRS Publication 334- Small Business Guide.
Brittany Sabalza, EA, is director of Tax Education at Pro Tax Solutions Indianapolis, and a tax columnist.