Paying for Family and Medical Leave Will Help Employees Handle Life’s Challenges and Generate Tax Savings
By Kulanith Jiaranai, Supervisor, Tax & Business Services
Among the many changes included within the Tax Cuts and Jobs Act (TCJA), which was signed into law in December 2017, the Family and Medical Leave Credit is one employers should pay attention to, as it can result in tax savings. Eligible employers who pay for family and medical leave may claim this credit, based on wages paid to qualifying employees, subject to certain conditions. This is a General Business Credit and is in effect for wages paid in taxable years beginning January 1, 2018, and before January 1, 2020.
What is Family and Medical Leave?
Paid family and medical leave is not part of a typical paid vacation, personal, medical or sick leave. It is paid leave available for one or more of the following reasons:
- Birth of a child of the employee and newborn child care.
- Placement of a child in an employee’s home as a result of adoption or foster care.
- Serious health condition that makes the employee unable to perform his or her position.
- A qualifying exigency arising out of the fact that the spouse, child, 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.
- Care of a service member who is the employee’s spouse, child, parent, or next of kin.
If an employee is paid for leave other than for one of the purposes described above, that paid leave is not considered to be Family and Medical leave. In addition, any leave paid by a state or local government or required by state or local law will not be taken into account in determining the amount of paid family and medical leave provided by the employer.
Who is a Qualifying Employee?
A qualifying employee is an employee, as defined under the Fair Labor Standards Act, who has been employed by the employer for one year or more and who, for the preceding year, is not considered to be a highly compensated employee. (For 2017, an employee must not have earned more than $72,000).
What are the Requirements for an Eligible Employer?
In order for an employer to be eligible for this credit, the employer must have a written policy in place that meets the following requirements:
- The policy provides at least two weeks of annual paid family and medical leave for all qualifying employees who work full–time, and prorated for employees who work part time; and
- The policy requires that the rate of payment under the program is not less than 50% of the wages normally paid to that employee for services performed for the employer.
A transition rule allows a written policy, or an amendment to it, to be adopted by the end of 2018 and retroactively considered in place as of 2018, as long as the employer’s leave practices are in compliance with the terms of the policy or the amendment for the entire period it covers, and the employer makes any retroactive leave payments no later than the end of the employer’s tax year.
How is the Family and Medical Leave Credit Calculated?
An eligible employer is permitted a credit based on wages paid to the qualifying employee while on leave for up to 12 weeks per taxable year. The credit is a percentage of the amount of wages paid to qualifying employees while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5%, which increases by 0.25% for each percentage point by which the rate of payment exceeds 50%, with a maximum of 25%. In certain cases, additional limits may apply.
- An eligible employer pays $20,000 of wages to qualifying employees for the purposes of medical and family leave. This amount is 50% of the wages normally paid to the employees. The employer can claim a paid family and medical leave credit of 12.5% of $20,000, or $2,500.
- Same fact as above, except the amount paid is 60% of the wages normally paid to the employees. The 60% rate of payment exceeds 50% by 10%. The employer’s credit is increased by 10 x 0.25%, or 2.5%. The employer can claim a credit of 15% (12.5% plus 2.5%) of $20,000, or $3,000.
No deduction is allowed for the portion of wages incurred or paid for a tax year if the wages were already taken into account to determine any other general business credit. In addition, an employer cannot take both a credit and a deduction for amounts for which the paid family and medical leave credit is claimed.
This new tax credit provides employers with both a potential tax credit and the goodwill of the employees. If you have questions related to this credit or how it may be a benefit to your organization, contact your Marcum tax professional.