New Family Medical Leave Tax Credit
February 22, 2018 — [9/26/18 Update: The IRS has issued further guidance on how to calculate the credit—and there is also a Q&A section.]
There has been a lot of talk about the “big” tax law changes—modified tax rates, deductions, etc. However, many other provisions should mean a lot to taxpayers as well.
Are you one of the many employers due a tax credit? There's one available to employers who offer their employees paid family and medical leave during 2018 and 2019.
Family and medical leave is defined in the Family and Medical Leave Act of 1993 (FMLA). The following circumstances give rise to a leave that qualifies for this credit:
- the birth of a child of the employee
- the employee needs to care for their spouse, child, parent who has a serious health condition
- the employee takes in a foster child or adopts a child
- the employee has a serious health condition that causes the employee to be unable to perform their functions at work
- an urgent need of the employee who has a spouse, child or parent on active duty in the Armed Forces
The credit is equal to 12.5% of the amount paid for the leave if the amounts paid are at least 50% of normal wage payments to the employee. For each 1% that the leave pay exceeds the 50% test, the credit is increased by .25%. So if the employee receives full wages while on leave the credit is equal to 25% of the leave pay. The credit applies to a maximum of twelve weeks of paid leave per employee per year.
To be eligible for the credit, employers must have a written policy in place which provides full-time employees at least two weeks of paid family medical leave and provides part-time employees a pro-rated amount of leave. The policy must provide that the rate of FML pay will not be less than 50% of the employee’s normal wage. There must also be a clause in the policy that states that employees won’t be penalized in any way for taking paid family and medical leave. It is important to note that this paid leave can’t be provided to the employee as vacation, sick leave or personal leave. The family and medical leave must be separately identified in the employer’s written policies.
The credit applies to employees who have been employed by the employer for at least one year and who were not paid more than 60% of the compensation threshold for determining highly compensated employees under the qualified retirement plan rules. For 2017, the employee’s wages could not exceed $72,000.
There are some other limitations that apply to the credit. The employer can’t deduct the paid leave and claim the full credit on such payments. Therefore the employer must reduce their wage expense on their tax return by the amount of the credit. The credit is also limited to the employee’s normal hourly wage rate multiplied by the number of hours of leave taken by the employee. For pass-through entity owners who are subject to alternative minimum tax (AMT), the credit can be used to reduce AMT.
The key to claiming this credit is ensuring your written policy explicitly defines the leave and how it will be paid to meet the criteria of the new law. Employers should review and update their policies now and revise as necessary to allow for this credit.
If you have any questions about this new tax credit, please contact Gloria McDonnell at Redpath and Company.