New Tax Credit for Employer Paid Family and Medical Leave
There is a new tax credit called the Employer Credit for Paid Family and Medical Leave available to employers that has been established by the Tax Cuts and Jobs Acts (TCJA). This credit is available for the 2018 and 2019 tax years at which point it is set to expire, absent any legislative action to extend the credit beyond two years.
In short, employers will be allowed to take a credit for a percentage of wages that an employee is paid while on family and medical leave. However, there are extensive requirements under section 45S that must be met to determine if the leave policy is eligible for the credit and what percentage of wages employers can take as a credit. The IRS recently issued a series of Q&A’s to help clarify how many of these requirements are applied. However, despite this guidance, there are still many remaining questions which will hopefully be answered when the IRS issues Regulations. Below are some of the requirements along with an explanation of how the credit is calculated.
There must be a written policy in place before the paid family and medical leave for which the employer claims the credit is taken. Here is a list of some of these requirements for the policy:
- The policy must cover all qualified employees. Qualified employees are those who have worked for the employer for a year or longer and whose compensation does not exceed a specified amount. To be eligible for the credit for 2018, an employee’s compensation for 2017 may not exceed $72,000.
- At least two weeks of paid leave are provided to qualified full-time employees. The required time off paid leave must also be provided to any part-time employees on a prorated basis.
- Qualified employees must be paid at least 50% of their wages while on leave.
- The leave must be designated for Family and Medical Leave Act (FMLA) purposes.
The written policy requirement must be satisfied by December 31, 2018 in order to take this credit for any wages paid for 2018.
Calculation of the Credit
The credit will be calculated based on the percentage of wages that the employee is paid while on leave. The wages paid to the employee will be multiplied by an applicable percentage to calculate the credit. The base percentage is 12.5% and it will be increased by 0.25% for each percentage point over 50% to determine the applicable percentage, which cannot exceed 25%.
It is important to note that the amount of leave that may be taken into account for a qualified employee for any taxable year cannot exceed 12 weeks. Also, leave paid by a state or local government or required by law is not taken into account for determining the credit or the percentage of wages that are paid while on leave.
In order to claim the credit, IRS forms 8994, Employer Credit Paid and Medical Leave and Form 3800, General Business Credit will have to be included with the tax return. If the credit is claimed, then deductible wages will be reduced by the amount of the credit.
While this is a tax credit that employers who pay employees while out on qualifying leave could benefit from, the requirements to qualify for the credit are complicated. If you do qualify to use this credit, then it is crucial that you implement a written policy which meets all the requirements for medical and family leave under section 45S.