The Tax Cuts and Jobs Act (TCJA) provides a new tax credit for business owners who provide paid family and medical leave to their employees.
The benefit is only available for tax years 2018 and 2019, and specific circumstances must be met in order to claim the credit.
Employers can receive a credit for a percentage of the wages they pay employees during their time on eligible family or medical leave. To claim the credit, organizations must have written policies in place that (1) offer at least two weeks of paid leave to their full-time employees, and (2) pay employees at least 50% of their wages during their time on leave. The credit will be awarded for up to 12 weeks of paid leave.
The applicable credit percentage ranges from 12.5% to 25% of leave payments, depending on how much is paid. When employers pay employees 50% of their regular salaries, they will receive a 12.5% credit of the amount paid. Those who pay their employees 100% of their regular salaries while on leave will receive the full 25% credit. When leave is repaid between 50% and 100% of regular salaries, the credit can be calculated using the following formula, where P equals the percentage of the employee’s regular salary that is paid:
Applicable Credit Percentage = [(P – 50%) x .25] + 12.5%
Let’s look at an example:
2018, an eligible employer paid a qualifying employee $1,000 for two weeks of
paid family and medical leave. This $1,000 is equal to 80% of the employee’s
normal wages for that two-week period.
Using the above formula, the applicable credit percentage would be 20%, making the employer’s paid
family and medical leave credit $200.
Applicable Credit Percentage: [(80% – 50%) x .25] +12.5% = 20%
Credit Calculation: 20% x $1,000 = $200
Qualifying for the Credit
Organizations must meet some basic requirements before they can claim the credit. Here are a few of the requirements:
Employees must be qualifying.
Employees’ paid leave will qualify for the credit if two things are true
- Employees cannot make over $72,000 in each of 2017 or 2018; and,
- Their employment would qualify for leave under the Family Medical and Leave Act (FMLA).
FMLA requires employees to work a certain number of hours and be employed for at least 12 months, among other requirements. There is, however, an exception to this rule; employers can elect to cover all of their employees in their paid family and medical leave policy, even those who do not qualify for FMLA, as long as their policy provides “non-interference” protections. Your CPA can help you draft the appropriate language.
The leave must be qualifying.
The following life events would qualify as sufficient reason to claim credit-qualifying paid leave.
- Birth and care of a child
- Care of a newly adopted or recently placed foster child
- Care of a spouse, child, or parent with a serious health condition
- Management of one’s own serious health conditions
- Exigency due to a family member’s call to active duty in the Armed Forces
- Care of a next-of-kin service member in the Armed Forces
The policy must be thorough.
The organization’s paid family and medical leave policy
must provide employees with at least two weeks of paid leave (prorated for
part-time employees) at a rate of 50% or more of the employee’s normal wages.
To qualify for this credit in 2018, taxpayers must have a written policy in place as of the last day of the year, with the effective date retroactive to the date they want to start receiving the credit. The IRS allows catch-up payments to be made to employees who would have qualified for the credit had the policy been in place at the time of their leave, but these retroactive payments must be made no later than the last day of the taxable year. To qualify for this credit in 2019, taxpayers must have a written policy in place prior to their employees taking paid leave. Any qualifying leave that was paid before the policy’s effective date will not be eligible for the credit.
Time is Running Out
To qualify for the credit in 2018, taxpayers need to take action now. Not only does a written policy need to be in place by December 31st,