In light of the current trend toward state-mandated paid family and medical leave laws, recent tax reforms added a provision to the tax code allowing certain employers to claim a business credit based on wages paid to employees on family and medical leave, subject to certain conditions. The new provision, added by the Tax Cuts and Jobs Act, offers a general business credit of up to 25% of wages paid to certain qualifying employees while they are on family and medical leave. The credit will incentivize employers to offer paid family and medical leave, which will also help prepare employers for impending state and local paid leave laws. The credit is generally effective for wages paid in taxable years beginning after December 31, 2017 and is not available for wages paid in taxable years beginning after December 31, 2019. Therefore, employers interested in utilizing the credit should act quickly in the event Congress does not act to extend the credit beyond 2019.
The employer tax credit is calculated as a percentage of the amount of wages paid to a qualifying employee while on family and medical leave (as defined by the Family and Medical Leave Act of 1993 or “FMLA”) for up to 12 weeks per tax year. The credit is available only if the rate of pay for employees on leave is at least 50% of the employee’s normal wages. The credit is a minimum of 12.5% of the wages paid during leave and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages (up to a maximum credit of 25% of wages paid).
A qualifying employee is any employee under the Fair Labor Standards Act who has been employed for one year or more and, for the preceding year, had compensation that did not exceed the maximum statutory amount. For an employer claiming a Section 45S credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017. Employers taking advantage of the credit must reduce deductions for wages and salaries paid or incurred by the amount determined as a credit. Additionally, any wages taken into account for other general business credits may not be used toward the paid family and medical leave credit.
In order to take advantage of the credit, employers must establish written policies and procedures that operate in accordance with the requirements of the new Internal Revenue Code Section 45S as added by the Tax Cuts and Jobs Act. For example, each year, employers must provide at least two weeks of paid family and medical leave to all full-time qualifying employees, and prorate the same benefits for employees working part-time. Additionally, as noted above, whatever paid leave is offered by the employer cannot be paid at less than 50% of the wages the employee normally receives. Employers can offer up to 12 weeks of paid leave annually under their written policies. The credit is available to employers that are not subject to the FMLA, so long as the employer offers paid family and medical leave consistent with the credit’s minimum standards and establishes a written policy governing the leave.
For purposes of the paid leave credit, “family and medical leave” includes leave taken for any of the following reasons: childbirth; placement of a child for adoption or foster care; caring for a spouse, child, or parent with a serious health condition; a serious health condition causing an employee to be unable to perform his or her work functions; qualifying events due to a spouse’s, child’s, or parent’s coverage on active duty or called to duty in the Armed Forces; or, caring for a spouse, child, parent, or next of kin that is a service member. However, employers should recognize that paid vacation leave, personal leave, or medical or sick leave provided by the employer will not be considered family and medical leave unless it specifically covers one of the aforementioned events. Additionally, leave provided under state and local law may not be included in calculating the employer credit. In other words, the Section 45S credit is unavailable regarding paid leave that is required under state or local law.
The IRS intends to provide employers with more guidance on the employer tax credit, including information on how paid family and medical leave will interact with other employer-provided paid leave, state and local leave laws, controlled group rules, and more. Until the IRS issues further guidance, please contact one of the McGrath North Employee Benefits or Labor and Employment attorneys with any questions or concerns.