Tax Credit Available for Employers Offering Paid Family Leave

• November 27, 2018
• Amanda Garnett

The Tax Cuts and Jobs Act (“TCJA”) includes a new tax credit for paid family and medical leave.  The TCJA allows employers to claim an income tax credit for a percentage of the wages paid toward maternity, family, or medical leave provided to their employees if certain criteria are met.

Eligibility

In order to be eligible, employers must have a written policy in place allowing for paid family and medical leave.  Generally, this should be a separate from the institution’s standard vacation or sick pay policy.  For employers without an existing policy, it may still be possible to put a policy in place before year end and make it retroactive to January 1, 2018.

The policy must allow:

• Qualifying full-time employees at least two weeks of paid family and medical leave a year
• Part time employees a pro-rated amount of leave

Qualifying employees for the credit are those who have been employed for one year or more and who in the preceding year had compensation of not above a pre-established threshold.  For a 2018 credit, this would equate to a prior year salary of not more than $72,000.

Family and Medical Leave Defined

Paid leave as it relates to this credit covers a number of areas including:

• The birth of a child
• The placement of a child through adoption or foster care
• Care of a ill family member
• Serious illness of the employee
• Leave related to having a family member on certain types of active military service

The maximum leave allowed for purposes of the tax credit is twelve weeks.  Paid leave provided as vacation leave, personal leave, or sick leave is not considered qualified family and medical leave.

Calculating the Credit

The credit is available as long as the amount paid to employees on leave is at least 50% of their normal wages.  The credit amount starts at 12.5% of wages paid and can go up to 25% depending on the percentage of wages paid to the employee while they are on leave.

The tax bill does not allow for double dipping.  So employers claiming the credit are not also allowed to deduct the employee’s wages on their corporate tax return, but the credit amount earned would be more valuable to employers to offset their tax than the amount of this lost deduction.

Temporary Basis

Under the TCJA, this is a temporary credit and is only currently available for the 2018 and 2019 tax years.  However, there is a possibility that this credit could be extended in the future.

Next Steps

If you have paid any family or medical leave during 2018, there may still be time to update your policies to ensure eligibility for this credit.  For additional information, the IRS has released a series of Frequently Asked Questions (FAQs).

CLA is here to help.  Please contact us.

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