December 7, 2018
The IRS announced that eligible employers who provide paid family and medical leave to their employees may qualify for a new business credit for tax years 2018 and 2019. In
, the IRS provides detailed guidance on the new credit which was enacted by the Tax Cuts and Jobs Act (TCJA).
To be eligible for the tax credit, an employer must have a written policy in place that provides:
- At least two weeks of paid family and medical leave for full-time employees.
- At least a proportionate amount of leave for each part-time qualifying employee.
- The policy must provide for payment of at least 50 percent of the qualifying employee’s wages while the employee is on leave.
- If an employer employs qualifying employees who are not covered by Title I of the Family and Medical Leave Act (FMLA), the employer’s written policy must include language providing “non-interference” protections, as described in Section A of Notice 2018-71. Title I coverage applies to certain limited federal employees, including:
- Individuals employed on a temporary appointment of one year or less.
- Individuals employed on an intermittent appointment.
- Employees of the U.S. Postal Service and the Postal Rate Commission.
- Employees of the government of the District of Columbia.
An employee is not required to work a minimum number of hours per year to be a qualifying employee.
The written policy must incorporate substantive rules that must be met for an employer to be eligible for the credit.
The tax credit only applies to leave that is taken for a reason permitted under
Qualifying reasons for FMLA include:
- The birth of a son or daughter of the employee and the care of such son or daughter.
- The placement of a son or daughter with the employee for adoption or foster care.
- The care of spouse, son, daughter, or parent of the employee who has a serious health condition; or a serious health condition of the employee that makes the employee unable to perform the essential functions of his or her positions.
- Any qualifying exigency (need) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on covered active duty (or has been notified of an impending call or order to covered active duty) in the Armed Forces.
Paid leave that is provided as vacation leave, personal leave or sick leave is not taken into consideration.
In addition, eligible employers who set up qualifying paid family leave programs or amend existing programs by December 31, 2018, will be eligible to claim the employer credit for paid family and medical leave, retroactive to the beginning of the employer’s 2018 tax year, for qualifying leave already provided. As explained in the
for an employer’s first taxable year beginning after December 31, 2017, a written leave policy or an amendment to a policy (whether it is a new policy for the taxable year or an existing policy) will be considered to be in place as of the effective date of the policy (or amendment), rather than a later adoption date, if:
- The policy (or amendment) is adopted on or before December 31, 2018, and
- The employer brings its leave practices into compliance with the terms of the retroactive policy (or retroactive amendment) for the entire period covered by the policy (or amendment), including making any retroactive leave payments no later than the last day of the taxable year.
How to Calculate the Tax Credit
how to calculate the credit including the application of special rules and limitations. The amount of the credit is calculated based on a percentage of wages that are paid to qualifying employees for paid family and medical leave. The percentage amount, which begins at 12.5 percent and is capped at 25 percent, increases by .25 percent for each percentage point by which the rate of payment for paid family and medical leave exceeds 50 percent of the employee's normal wages.
The amount of an employee's paid leave that may be used to calculate the credit for a taxable year cannot exceed 12 weeks. Also, the tax credit with respect to an employee for a taxable year cannot exceed an amount equal to the employee's normal hourly wage rate multiplied by the number of hours for which family and medical leave is taken. If an employee is not paid an hourly wage, the employee's salary must be prorated to an hourly wage rate.
Only paid family and medical leave provided to employees whose prior-year compensation was at or below a certain amount qualify for the credit. Generally, for tax year 2018, the employee’s 2017 compensation from the employer must have been $72,000 or less.