The Tax Cuts and Jobs Act, signed into law in December 2017, created a new business credit for employers that offer paid family and medical leave under new Section 45S. The IRS released initial guidance in the form of FAQs for this employer tax credit.
An eligible employer is one that has a written policy that provides at least two weeks of annual paid family and medical leave to qualifying employees who work full-time (and prorated for employees who work part-time).
A qualifying employee is any employee who has been employed for one year or more, and who for the preceding year, had compensation not more than 60 percent of the threshold for a highly compensated employee. Thus, for an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017.
The tax credit is available for an employer’s paid family and medical leave program that provides wage replacement to employees who need time away from their jobs for one or more of the following reasons:
- To care for a newly born, adopted or fostered child;
- To care for the employee’s spouse, child or parent with a serious health condition;
- For a serious health condition that makes the employee unable to perform the functions of his or her position;
- To assist loved ones when a spouse, child, or parent is deployed on active military service; or
- To care for a service member who is the employee’s spouse, child, parent or next of kin.
An employer may not claim the credit for paid leave provided under the employer’s vacation or personal leave policy, or other medical or sick leave that does not satisfy the purposes stated above. In addition, any leave paid by a state or local government, or required by state or local law, is not eligible for the credit.
Amount of the Credit
The base credit amount is equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave. However, the applicable percentage is increased (but not above 25 percent) by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent of the wages normally paid to such employee for services performed for the employer. The credit is limited to the amount that would be paid at the employee’s normal hour rate for the number of hours for which the employee takes family and medical leave, but may not exceed 12 weeks.
For example, if your company policy pays 50% of employee wages while out on leave the credit is for 12.5% of those wages. If the policy pays 100% of wages while out on leave the credit is for 25% of those wages. With a policy in place that pays 100% of wages and an employee who is paid $12,000 during paid leave the credit would be for $3,000.
Interaction of the Paid Family Leave Tax Credit with Deductions and Other Wage-Based Tax Credits
An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. In addition, any wages taken into account in determining any other general business credit (e.g., the Worker Opportunity Tax Credit or any applicable disaster relief employee retention tax credit) may not be used in determining the paid family and medical leave tax credit.
Tax Year Availability of the Credit
The credit is available for wages paid during the employer’s taxable years beginning after December 31, 2017 and before December 31, 2019. The credit may be extended at a later date.
– The federal paid family and medical leave program is voluntary and employers are not required to maintain such policy. Employers considering adopting the program should assess the benefits, costs and impact on other leave programs.
– The paid family and medical leave program provides wage replacement to employees who need time away from their jobs for exigent circumstances. Such program may increase talent retention, recruitment, and employee appreciation. However, there are increased employer costs to maintaining the paid leave program, which is generally funded by the employer’s assets (rather than employee contributions or insurance carriers). If an employer adopts a paid family and medical leave program for the first taxable year beginning after December 31, 2017, the federal government will share 12.5 to 25 percent of the wages paid under the program for two years.
– An eligible employer’s policy regarding amounts paid to be during family and medical leave must be separate from the employer’s policy regarding other types of paid time off (e.g., paid leave as vacation leave, personal leave, or certain medical or sick leave).